Investors confused by plethora of acronyms in ‘ethical’ fund names

The myriad terms used to describe investment strategies, such as ‘ethical’, ‘sustainable’, ‘SRI’ or ‘ESG’ may be clouding the investment universe.

Terminology has caused confusion throughout the ­financial sector, and nowhere more so than in the attempt to define a style of investing that aims to be “ethical”.

Whether the managers label their funds as being ethical, sustainable, SRI (socially responsible investing) or ESG (environmental, social, governance) invites debate. For managers, such a debate is ­important because it also means defining the fund’s investment objectives.

Eric Borremans, head of SRI at BNP Paribas Investment Partners, says there are three approaches. Firstly, those including norms and sector-based exclusions.

For example, excluding investments not meeting the UN Principles for Responsible ­Investment (UNPRI), or avoiding companies manufacturing land mines or cluster bombs.

The second approach adopts responsible investing in the widest possible sense, and is applicable to all assets under management.

This means it effectively excludes about 5% to 7% of the universe. This is manageable and does not, for example, alter tracking error or risk much. It is easier to find substitutes.

The third way involves thematic portfolios. It is not about exclusion, but about focusing on specific ­sectors – for example, climate funds, microfinance funds, or ­environmental funds.

Exclusion approaches can apply to 100% of a portfolio or the universe, but the second and third approaches are harder to apply to all assets. It depends on the individual investor’s appetite, he adds.

­Borremans also distinguishes between what he calls “best in class” and ethical approaches.

The former can easily be applied as an overlay to existing approaches. This means the ethical part remains marginalised – for example, typically it may be applied to 5% or so of a global portfolio.

A straightforward ­thematic approach is more easily understood by the retail investor.

But the best in class approach has an advantage in that while it may work only as a tool for investing in 5% of the global economy, that part is growing much faster than the remainder.

For example, “cleantech” is attracting more institutional investors keen to hedge against rising CO2 emissions.

The main challenge of communicating the different approaches concerns retail investors.

BNP Paribas IP publishes additional financial reports to illustrate the added value of environmental and social value factors ­compared to the benchmark.

UKSIF, the British network for ­sustainable and ­responsible financial services, has among its members Bank of America Merrill Lynch, Citi Investment Research, Crédit Agricole Cheuvreux, Goldman Sachs, Morgan Stanley, Oddo Securities and UBS.

Lisa Wootton (pictured), project manager at UKSIF, ­says that her organisation often tailors the ­language to suit the ­audience. For example, when promoting its National ­Ethical Investment Week for wider audiences, the “green” and “ethical” terms are emphasised.

But when talking to pension funds and other ­institutional investors, terms such as “sustainable” or “responsible investment” may be more frequently used.

The point is that different people have different opinions in these matters, she says.

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