Ethical investors need to make sure they are putting their money into funds that are truly aligned with their values and avoid those that are just ‘greenwashing’ their portfolios. 
That’s the view of Ketan Patel, co-manager of the £137.5m EdenTree Amity UK fund, who believes that large parts of the asset management industry are not fully committed to environmental, social & governance (ESG) or socially responsible investing (SRI) despite their well-publicised moves into the space.
Figures from the Investment Association show that ethical investing remains a relatively niche area, with just £17bn held in ethical funds – or 1.4 per cent of the industry’s assets under management.
However, there has been a recent uptick in activity when it comes to ESG. The past few years have seen a raft of new products targeting themes such as climate change and gender diversity in response to growing interest, while fund groups have become increasingly vocal about how they apply to ESG principles in their investment process.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
EdenTree Amity UK launched in 1988 and invests in UK companies that make a positive contribution to society and the environment through sustainable and socially responsible practices.
But having been a part of the sustainable investing community for over 30 years, the manager said he is frustrated at the way ESG and SRI seem to be getting diluted within the industry.
“For us as a house it’s the core of our DNA, that’s what we do. We’re lucky that we’re into the sweet spot now,” he said.
“What we have is an issue with is the big guys coming in to try to take the pie and take the money. And once that area gets a bit less lucrative they’ll just dump it, because they can. It’s peripheral for them.
“The argument is that SRI and ESG are going to go mainstream because the big houses are doing a lot of greenwashing.”
Patel’s call for change stems from his belief that the growing interest in ethical investing from the larger houses is just a kneejerk reaction to the new wave of investor whose generational concern is climate issues.
He feels that some groups are making these shallow moves to capitalise on the trend, rather than trying to genuinely imbed SRI principles within their ethos to bring about more substantial change.
He said: “Millennials, the generation from 1980 onwards, are much more in tune with where the money’s going – 20 years ago the fund manager didn’t have to tell you which holdings he had.
“The mainstream fund managers are there to make money. There’s a huge amount of pressure on fees and you can charge a higher fee for an ESG product. They’re now saying ‘oh this is really great’, but we’ve been [investing in this way] for 20 years.”
The EdenTree Amity UK co-manager argued that the lack of commitment that big fund houses have towards sustainability is demonstrated through their relative lack of support staff who are specially trained in ESG analytics, enabling them to think both financially and non-financially about investments.
Patel added that this apparent lack of commitment to being fully sustainable means there is a disconnect between the new products being created by fund groups and where the underlying investor wants their money to go.
“If they say I’m going to sell you a global ESG index, you think fantastic. Actually the underlying holdings show that it’s got everything except for tobacco,” he explained.
“But the investor didn’t want any oil either. If the fund group is going to design a product saying ‘Here’s a global ETF’ which has got x-mining, x-this, x-that, then fine. But they’re not – they’re just offering you a very ordinary fund.”
In order to improve this, Patel would like to see better practice from the industry, with groups being more open about exactly what is being held in and excluded from their ethical portfolios.
The drive for change from EdenTree comes from its longstanding relationship with sustainable investing, with Amity UK being one of the first funds of its kind in the late 1980s. Amity UK’s stock picking process runs on a two-sided positive and negative screening approach.
“Where the interface has to come is the conversations you’re having with me as a fund manager,” the manager said.
“Because when you go to meet another fund manager, they will talk about the fund, the ratios, margins, markets. Not at one single point will they care about any social utility, the environmental impact, the geography: they will just care about profit margin.”
Patel runs the EdenTree Amity UK with co-manager Sue Round, director of group investments at EdenTree. The fund has an ongoing charges figure (OCF) of 0.79 per cent and is yielding 2.23 per cent.