As great as ESG investing is, it does come with its complexities. As we saw with the ESG analysis of companies, it is often difficult to know how well a company should be rated using ESG factors. And this is not just the case for companies, but it’s also true for funds, property and other forms of investment.
The ESG fund market is perhaps the most challenging market to navigate. The key issue being that there are hundreds of funds that label themselves as ‘ethical’, ‘sustainable’, ‘green’ and so on, yet many of them contain holdings which do not match this description. To make matters worse, many of these funds also provide an ESG criteria in the fund’s objective which they do not seem to follow.
A good example is the Royal London UK FTSE4Good Tracker Trust which follows the FTSE4Good UK Index which is ‘a tool for investors seeking to invest in companies that demonstrate good sustainability practices’ and who are looking to ‘encourage positive change in corporate behaviour’. However, the fund contains holdings in Royal Dutch Shell, BHP Group, and Rio Tinto, a leading global mining group. Most people would agree that these companies are not looking to create positive change and do not provide examples of good sustainability practices.
These challenges have been faced by all institutional investors looking to invest in ESG and it’s good to see that improvements have been made in the market in the last few years. Because of these complexities, many ratings agencies now provide ESG research, meaning that it is more difficult for funds to falsely market themselves as ESG.
It not only means that investors have to worry less about investing in something that they don’t want to invest in, but it also means that many of the funds previously using these false descriptions have been forced to act. That is to say, many funds, which may have previously described themselves as ‘sustainable’, yet contained unsustainable holdings, have since updated their holdings to match the fund’s description. As a result, there is a greater choice of ESG funds available to investors.