The field of ESG is developing quickly. This creates another problem because the developments come from various sources: technology, legislation and sudden change in social mood.
This leads onto another point. These developments can be very hard to predict and what may be considered now to be ESG compliant, may not be considered to be so in future years.
Again, it is incumbent on the DIM to make their own enquiries and evaluations and play out what if scenarios on its underlying investments. The problem here is exacerbated because these developments may not be linked to movements in the global economy as a whole and therefore losses arising from ESG investment may happen in isolation.
This may leave underlying investors confused and again DIMs would be advised to ensure suitable caveats are in place to cover this.
Clearly ESG is another minefield for DIMs to negotiate and, as with all of these problems, there are services springing up to help deal with evaluating underlying investments.
If a DIM chooses to employ one of these agencies to help determine which investments are ESG compliant then it would be advisable to ensure the selection is supported by a detailed due diligence process which stands up to outside scrutiny.
ESG could be a catalyst for greater transparency in the investment industry and part of this drive could come from DIMs. After all, how are they going to decide if a fund meets their criteria for being ESG-compliant or not if they are not aware of the investment policy and decision-making process along with details of each and every investment they make? ESG will undoubtedly require fund managers to be more open about this.
The DIM could be faced with a bewildering choice in the ESG field as product providers innovate to provide solutions in this arena. The routes a DIM can take are:
- Invest directly into equities and bonds
- Invest in funds
- Invest in ETFs
As far as funds are concerned, there are a number of choices on offer at the moment from institutions. The institutions market ESG funds based on their own internal ratings and it is this rating system the DIM must interrogate and ensure is compatible with the firm’s ESG policies and its clients’ needs.
The problem is institutions cloud the issue by using the term “Sustainability”. As indicated before, ESG is comprised of three different elements. Sustainability stretches across all three but does not totally encompass each one.
So, when the term is used the DIM should make their own enquiries as to how it passes its own ESG test.
