5 important things your clients need to know about ESG funds

It wasn’t that long ago that ethical investing was a niche market and wasn’t taken seriously by many in the financial sector. How things have changed in recent years, with more investors now looking to put their money into investments that are socially and environmentally responsible.

Your clients may be among those looking to invest in a way that is ethically and environmentally responsible, for example if they have recently received a lump sum such as an inheritance. If they are new to investing, they could be unsure where to start when it comes to finding funds that are in line with their ethics and beliefs.

In addition, with new, responsible funds opening monthly, it could be daunting for your client to know where to begin. Read on to discover what ethical and sustainable investment funds are, what your clients need to be wary of, and how a financial planner could help them.

Ethical investments broadly have three criteria

Once known as “sustainable investments”, today they are better known as “Environmental, Social and Governance (ESG)” funds. These refer to the criteria used to establish the impact of a business and its activities, as follows:

  • Environmental – this looks at how the company’s operations impact the environment. This may include energy use and efficiency, as well as managing waste responsibly.
  • Social – the criteria look at a company’s business relationships, such as how it treats its workers and whether it works with its supply chain to ensure the ethical treatment of suppliers’ staff.
  • Governance – this looks at how a company is run, including the transparency of its accounting methods, the business’s tax strategy and whether shareholders can vote on key issues.

More people are now considering ESG investing

As the world is more connected than ever through the internet and social media, it’s easier than ever to understand the environmental and social impact companies can have. As a result, it seems more people want to invest in ESG funds as they try to do their bit to tackle global warming and social injustice, in much the same way as buying Fairtrade goods.

With this in mind, if your client wants to invest inherited money into ESG funds they’re probably in good company. According to Morningstar, the amount of money put into ESGs almost doubled in the six months leading up to the end of September 2021.

This dovetails with an article by This is Money, which revealed that research carried out in 2021 found that two-thirds of UK investors want to invest responsibly.

ESG funds may provide better growth potential

A report by FTAdviser makes for interesting reading. It revealed that funds with a high ESG rating outperformed lower-rated counterparts in all but one month between January to September 2020. The only month ESGs did not outperform was April.

Furthermore, Morningstar found that 75% of their ESG-screened indexes outperformed non-ESG equivalents in 2020, with 88% performing better over the five years to December 2020. While 2021 has seen more ups and downs for ESG funds, there are still signs they may provide strong long-term performance.

Beware of “greenwashing”

One issue your client will need to be aware of is the risk of putting their inheritance into funds that are not as sustainable as they appear. This is where some companies make unsubstantiated or misleading claims about their sustainable and social credentials, something that seems to have increased with the rising popularity of ESG funds.

In October 2021, Money Age reported on a study by Triodos Bank UK, which found 26% of consumers would not invest in ethical funds as they questioned their validity.

A financial planner could help

While greenwashing is an issue, a financial planner can help your clients identify ESG funds that could stand up to scrutiny. This means your client could expose their inheritance to potential growth while investing in a way that’s in line with their ethics and beliefs.

If they are not sure how to go about it, or have concerns about greenwashing, a financial planner could help. They could help confirm the validity of any ESG fund your client may be considering and provide alternatives that might stand up to closer scrutiny if necessary.

Get in touch

As you may be aware, we have recently been named one of the top 100 financial advice companies in the UK in 2021. If you want to learn more about why we were named in the prestigious New Model Adviser Top 100 award, read our recent blog.

While assessing us, judges recognised our use of sustainable and ethical funds, with three-quarters of investment portfolios we recommended in the year up to November 2021 being ESG.

This means you can have peace of mind that your clients will not only receive the right advice and excellent service, but they will also be speaking to a company that’s highly experienced in dealing with ESG funds.

If you have clients who you feel would benefit from speaking with us, please get in touch by emailing hello@ardentuk.com or calling 01904 655 330.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Please note, this article only deals with England and our understanding of English Law.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Get in touch

By talking about your current situation and listening to your aims, we create a personalised plan that will put you on a path to achieving your aspirations.

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