HB: It makes sense if the UK, like the EU, aims to channel capital flows into sustainable activities.
FTA: How do investors square not liking fossil fuels with the investment value the commodity might bring?
HB: Many sustainable funds do avoid or limit fossil fuels, but there’s no formal requirement or informal consensus that they do so.
For funds that do exclude fossil fuels, it’s important to understand the specific parameters around the exclusion. Is it a total exclusion or is it focused on excluding the worst fossil fuel types and practices?
Excluding thermal coal, Arctic oil and gas exploration and oil sands extraction has become common practice among most sustainable funds. But it’s less the case with other types of fossil fuel activities.
If sustainable funds do invest in fossil-fuel companies, they may focus on best-in-class firms that perform better on ESG issues than peers in the industry.
The sustainable funds that do invest in fossil fuel firms often argue that engaging with these firms, as shareholders, prods the firms into making commitments to reduce emissions and adjust their business models, which can produce greater impact than avoiding them altogether.
Many sustainable funds also invest in so-called transition companies. These include operators that are building their renewable energy business, but still operating their legacy fossil fuel business. These companies may represent good investment opportunities.
FTA: Are firms accused of greenwashing (and the advisers selling their products) running the risk of regulatory enforcement?
HB: We’re already seen this happening, with the DWS investigation.
The risk of regulatory enforcement is making asset managers more cautious. That’s why we’re now seeing managers remove ESG from the name of some products and reclassify funds from Article 9 to Article 8.
FTA: How can advisers best research ESG investments and detect any forms of greenwashing?
HB: To avoid any disappointment, due diligence is key. There is a spectrum of different green ESG approaches that meet different investor needs and preferences.
Advisers shouldn’t rely on a fund’s name. They need to understand a fund's ESG objective and investment process. They should also look at the portfolio to check that the holdings are in line with their clients’ expectations.
Some investors want to avoid certain activities or sectors, like fossil fuels. Others don’t mind, they would rather their fund managers remain invested in such businesses so that they can use their power as shareholders to engage with company management and encourage positive change.
Advisers can use third-party ESG metrics and ratings to assess the greenness of a product or a manager’s sustainability credentials.
