Long reads

Providing better solutions for increasingly picky sustainable investors

Marco Mottadelli

Marco Mottadelli

Head of Global Brokerage, Fineco Bank

Sustainable investment is having a moment. There are now thousands of funds and indices specifically promising to deliver returns along with meeting a commitment to environmental, sustainability and government metrics. Whereas these options were once a rather niche section of the market, they have grown so rapidly in the past half decade that one recent estimate suggested that the majority of new fund products targeted at consumers would in some way be sustainability-oriented in one way or one another.

With additional choice comes additional responsibility. There’s no single magic button that can ensure investors meet ‘green’ targets through investing. That’s largely because there is no agreed upon metrics on what constitutes green investing, and additionally the individual goals of different investors often vary. Commonly cited goals are the desire to avoid certain polluting industries such as carbon-based energy or heavy mining, representation on company boards or policies around dscriminiation.

Several organisations have stepped into the fray in an attempt to provide standards. Leading investor education resource suggests the person of ESG criteria are to “help investors find companies with values that match their own.” Some major efforts are from market research providers such as Bloomberg and Morningstar, each of whom have their own proprietary rankings and analytics. The British Standards Institution – which is the UK national standards body – collaborated with the Department for Business, Energy and Industrial Strategy and the local financial services industry to create a ESG series of standards for fund managers which is officially recognized by the government.

While all of these efforts are helpful in standardising vocabulary and ensuring most of the industry is increasingly speaking in the same language, investors need to go beyond broad benchmarks. Instead, individual investors must understand that they will need to define and pursue their specific sustainability goals, and then put them into practice. The challenge of companies that allow individual British investors is to make it easier for them to understand and make those decisions.

At Fineco, we have divided the issue into two major areas of focus: data and access. It’s been a priority as we work to increase our capabilities for investors on our platforms looking for additional options in this area.

In terms of access, that means a broad range of products. Some of these come from speciality investors that are focused explicitly on sustainable investing. These companies have been around for a decade or more and typically now offer a series of investigable exchange-traded products or individual funds. It also means ensuring sustainable products from more generalist managers can easily be invested into, with reasonable fees and low minimums. Thankfully the broad trend in this area is more access.

Then we have data. Information is key to understanding whether a strategy is performing in line with ideas. Many investors want their sustainable investments to also provide a needed rate of return. A number of breakthrough academic papers have shown that many ESG investments are able to provide at least as much as many ‘traditional’ forms of investing. But with so much choice, investors need access to granular information about how their portfolios are performing over time, and how they compare to benchmarks both in and out of the sustainable category. And this can’t simply be available in annual disclosures and printed brochures – the standard is increasingly this comparative information is available as part of a firm’s app and/or web portal.

With greater knowledge, we expect rising expectations. Companies that fail to provide access and data will increasingly be abandoned in favor of providers that have these capabilities. Green investing sits inside a broader conversation around living a sustainable lifestyle, one that is only getting louder as pressure mounts for governments and companies to take action to blunt the harmful impacts of undesirable behavior. With COP26, a potentially generation-defining climate conference, happening in the United Kingdom later this year, it’s increasingly smart business for fund managers to turn their focus on levelling up their sustainable investing options.

Comments: (2)

Richard Peers
Richard Peers - ResponsibleRisk Ltd - London 29 April, 2021, 12:05Be the first to give this comment the thumbs up 0 likes

Thanks Marco a good summary of where are today with ESG.  Richard

A Finextra member
A Finextra member 30 April, 2021, 12:29Be the first to give this comment the thumbs up 0 likes

As a retail investor one of my objectives is to, "invest in the world I want to live in" so ESG funds on the face of it seem ideal, the other objective is to generate a return on my investment.

The problem I find, is with indexes that are available to me that are touted as ESG, still don't seem to match my criteria for Green/ethical investments. Vanguard, the default option for many a retail investor, have ESG funds such as the ESG Developed World All Cap Equity Index Fund, but a quick look at the companies that comprise that fund includes Nestle.

I would have expected certain companies to have been screened out, so I can avoid the need to go thru' a list of a fund's entire holdings to ensure that it doesn't include the obvious ones: arms/defence firms, tobacco, or companies with otherwise questionable ethical or environmental issues.

A better solution is indeed needed!