ESG label can't fool advisers

Every single week this year there have been environmental, social and governance funds launched or overlays heralded by investment houses across the northern hemisphere.

While many of these are welcome additions to the advisers' investment arsenal, run by great teams with deeply analytical processes, others are no more than a greenwash – and advisers can see right through it. 

Simply rebadging an investment strategy as 'ESG' is not going to cut the (ethically sourced) diamond. Claiming to be putting an overlay on your stock-picking process and calling this a 'commitment towards tackling climate change' and giving 'investors more choice', is not fooling anyone. 

As with any me-too investment product, while there will be some clear winners, there will also be plenty of losers and also-rans. Think funds launched in 2006 that were heavy on the use of credit default swaps, or the spate of structured products flogged in 2007 before Lehman's collapsed.

No client wants to be in an 'also-ran' product where a commitment to ESG did not come with a commitment to fiduciary duty.

Similarly, no client wants to be in a product that simply greenwashes or greenfudges its stock-picking credentials, let alone a product that proves to be a more expensive tracker fund with a little bit of tinkering around the edges. 

Advisers have already started to ask questions about the criteria, analysis and modelling of so-called ESG and 'green' funds. Those companies whose ESG funds stand up to scrutiny will win the day; the others will be left behind on the field or even fail to get out of the starting-blocks.

Cue claims being sent into the Financial Services Compensation Scheme as a result. 

Companies considering their ESG offerings for 2021 should take note: if your fund doesn't add up quantitatively, no amount of fine-sounding language will encourage advisers to choose it on a qualitative basis. They just won't take the risk, neither for them nor for their client.

simoney.kyriakou@ft.com