'When you launch an ESG fund, you’re making your own rules'

Investigative investment journalist explains that not all funds are created equal and understanding that is key to an advisor’s success

'When you launch an ESG fund, you’re making your own rules'

ESG is an unregulated term. Every advisor and investor must understand that about ESG, SRI, and Impact Investing. Every fund provider has a different definition of ESG and just because they’ve slapped ESG on the label of their latest fund, that doesn’t mean it fits with your clients’ needs. It might not even mean they’re screening out all of the sectors they say they are.

This practice, called “greenwashing” has been covered by Victor Ferreira, investment reporter at Financial Post. He told WP how and why fund providers will “greenwash” their products and how advisors can navigate the amorphous and ill-defined field to deliver what their clients want.

Ferreira is planning to share his findings on greenwashed funds at WP Invest ESG in Toronto on March 25, which is sponsored by Purpose Investments, BMO Global Asset Management and Morningstar. He shared a few advance insights with WP.

“If you're an investment firm and you have the desire to put out an ESG fund, you're basically making your own rules,” Ferreira said. “There's no certification process. There's no one proper definition or guideline that they all have to stick to.”

Ferreira said that one fund might define ESG as the exclusion of alcohol, tobacco, weapons and nuclear energy, but might keep oil and gas in. Another fund might leave out oil and gas in addition to the other “sin stocks”. Yet, another fund might actually leave all those sectors in, but only take the top 50 per cent of all the companies in each sector based on the complex math that results in an ESG score.

“You make your rules and you stick to those rules.” Ferreira said.

So how can advisors navigate when their clients say they want to invest more responsibly?

The first, most important rule is to know your client. If they’re an environmental activist but don’t have an issue with alcohol stocks, you’ll have to find funds that match their particular moral centre. In some ways, the ill-defined nature of ESG funds can work to your benefit, allowing you to find an ESG investment that suits the particular needs of your client.

Next, Ferreira thinks you need to start behaving a bit like an investigative journalist. Go into fund prospectuses, especially in ETFs which tend to have more accessible internal numbers. Mutual funds are, inherently, a harder area to fully assess.

Finally, you can push for more stringent certification. Ferreira said that in the wake of his stories on “greenwashing” the Responsible Investment Association (RIA), which had previously only functioned as a listing and educational service for funds claiming some ESG or socially responsible status, started talking about some kind of certification process.

“The larger firms are expecting regulation to hit them,” Ferreira said. “They don't know when but they're expecting that that can very well happen within the next couple of years.”

As for advisors, Ferreira says “you’ve got to do your homework”.

“It’s not just fund providers that have different definitions of ESG, investors themselves do to. Each person is different so you’ve got to dig into every fund to determine what suits you and what suits your client.”

Ferreira will be sharing some of his tips for spotting greenwashing as he leads a discussion on ESG definitions and navigating the often-confusing ESG world at WP invest ESG.

Register and purchase your tickets, including an early bird rate, here.