Thanks, no doubt, to the tones of David Attenborough underlining the impact of human existence on the planet and its ecosystems, as well as the recent explosion of the Extinction Rebellion protestors consciousness-raising on city streets, more and more people are becoming increasingly impassioned in their desire to practice conscious consumerism, both at home and in their investment choices. 
This idea of improving society through some form of ‘responsible investment’ is not a new phenomenon within the investment industry. However, the consideration of environmental, social & governance (ESG) factors has taken on a new power more recently, with some analysis suggesting that the number of funds available in the UK has increased tenfold in the last 20 years.
Along with this increase in available funds, there has also been an increase in investment approaches, with traditional ethical funds, which tend to apply negative screens to exclude so-called ‘sin-stocks’, having to make room for funds that extol the idea of engaging with companies to drive positive change or those which are impact-focused and so only invest in what one could term ‘saint-stocks’ .
Although allowing for more choice, this proliferation of strategies has also created more challenge in the form of confusion amongst investors. Indeed, not only are various terms like ESG, impact, and ethical being used interchangeably by the industry, there is also a significant divergence in the way that asset managers define these terms and how they have adapted their processes to include them. Thus, given that fund factsheets have been designed to objectively deliver the basic facts, they usually fail to capture the subjectivity of the many forms that ESG investing can take and the multitude of approaches that fall under this umbrella term.
In fact, many factsheets make no reference whatsoever to how, or if, the manager considers ESG as part of their investment approach. They do not include what or how many themes, such as the UN Sustainable Development goals, that the manager works from. Nor do they detail the impact that these factors may have had in preventing the purchase of a particular company or on a position size within the portfolio, for example. So, in essence, there is currently no real attempt being made to clearly identify or document how investors’ responsible investment expectations or wishes are being satisfied in practical terms on an ongoing basis.
Another key challenge that must be met in this area is how to measure success. As all factsheets demonstrate, it is relatively easy to assess performance in monetary terms. The problem, however, is how to capture the positive non-financial impact that ESG investments can have and then how to communicate these results. Indeed, the current measurement of this form of investing is more art than science and also often needs more than just data to convey the true power of an investment. This is something which will have to develop alongside the market, but as investors start to demand clearer reporting on the non-monetary benefits of investing, factsheets will have to be adapted accordingly.
Perhaps, to truly satisfy investors, asset managers will have to produce two; one which covers the fund’s financial performance and one which details its altruistic impact. However, they develop, a lot of work needs to be done on factsheets to ensure that they give investors an honest snapshot into all aspects of their investment, and not just focus on the fund’s performance.
John Monaghan, head of research at Square Mile Investment Consulting and Research. The views expressed above are his own and should not be taken as investment advice.