Rethinking ESG investing

Investing with environmental, social and governance (ESG) purpose was all the rage a few years ago. Hundreds of exchange-traded funds (ETF) have emerged to capitalise on this demand, many sporting shiny ESG credentials.

However, in recent months articulate critics – such as HSBC’s former sustainability adviser, Stuart Kirk – have come out attacking many of the core tenets of the ESG shift, arguing it would be better for funds to focus on a small number of properly-tracked core objectives.

Fund managers are responding by being specific about their impact. The most common reaction is to focus on reducing corporate carbon-footprints with some direct measures (such as more renewables).

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That’s pushing most funds towards the “E” bit of “ESG” – the environmental. However, if you’re interested in a more focused framework for sustainable businesses, it’s worth looking out for the UN’s 17 sustainable development goals (SDGs).

A new ETF issuer called Circa5000 is planning to bring five ETFs to market over the next year, which focus on SDGs and impact outcomes such as clean water, waste, health and wellbeing, and sustainable food.

A personal ESG checklist

For many people, deciding which funds they want to own will be a personal choice. So it’s helpful to have some sort of checklist based on your personal preferences you can use to help filter funds.

For a start, I want to invest alongside managers that engage with portfolio companies on ESG-related issues. A datadriven, box-ticking approach just won’t do it.

Many fund managers lazily rely on the leading ESG ratings and research services. The real skill in ESG is looking beyond these measures. Take the “S” in “ESG” for instance – how is the social impact measured?

Smart managers are now beginning to dig around and examine workplace accident records, or Glassdoor ratings looking at employee satisfaction.

Some funds also take an exclusionary approach – ie, they exclude whole sectors such as all oil companies or arms manufacturers. This has its own issues.

Take nuclear power: a controversial area, but many think – me included – we won’t make the energy transition work without nuclear power. The same is true of the defence industry.

Personally, I think backing the sector is crucial for supporting our democracies and defending our way of life. Still, many ESG funds exclude these businesses as that ticks the right boxes.

Considering all of these issues, I would contend ESG is difficult, though not impossible, to operate within an ETF framework. It requires decisions that might be better done by an active fund manager.

Finding a shortlist of ESG funds

So, how does this translate into some funds to put on a shortlist? There’s only one real candidate for me in the investment trust space: the very experienced team behind Impax Environmental Markets (LSE: IEM), who have a great record.

There’s obviously a much longer list of renewable energy and energy storage listed investment funds.

Options range from The Renewables Infrastructure Group (LSE: TRIG) through to SDCL Energy Efficiency Income Trust (LSE: SEIT), but that’s a whole different subject.

With ETFs, I’d focus on funds that peg their targets to the Paris-aligned benchmarks (PAB). Amundi is especially strong in that space, with funds such as the Amundi MSCI UK IMI SRI ETF (LSE: FT1K).

I also think that JPMorgan does a thorough job adding its own research data via its “research enhanced” range of ESG ETFs.

Last, but by no means least, renewables focused ETFs such as the huge iShares Global Clean Energy ETF (LSE: INRG) or the much smaller Invesco Solar Energy ETF (LSE: RAYS) are worth investigating.