Advisers should look beyond the label when it comes to ESG investments, according to Jordan Donaldson, investment director at Lumin VZ Group.
A report from the financial planning and investment firm analysed environmental, social and governance ratings for 95 companies in the FTSE 100 and found for two-thirds, the environment was the lowest-weighted factor in the ESG score.
It set out that there are now 998 ESG funds available in the UK and said different ratings providers use different methodologies and weightings.
It said investors may not be getting the environmental impact they expect from funds that boast an ESG rating.
The study concluded that ESG ratings, which are used to build sustainable funds, often place little weight on environmental factors despite the perception that they are primarily about climate and sustainability.
Donaldson said for most markets the environmental aspect of an ESG rating is usually the lowest weighted, making up around 20 per cent of the weighting.
“And for pretty much a quarter of the companies, the ‘E’ only makes up 5 per cent,” he added.
“When you think of ESG, naturally you go to the environment, but actually in most cases it is not really true.”
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Donaldson said, for advisers, looking at the fund data in detail was key to getting the right investments for their clients.
He said: “With something that is labelled ESG, you can’t really just take that as face value, you have to look down the line.
“Ultimately, it depends on what index provider has been used and what ratings they use, so I think you have to explore the underlying data and that can be the things that most people would ignore.”
Donaldson also said there are still concerns about ESG funds underperforming but called this unfair and put it down to a lack of understanding.
tara.o’connor@ft.com
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