One of the country’s most respected asset managers has criticised investment groups that have jumped on the ethical bandwagon offering portfolio services and funds that do not fit the bill.
Alan Miller, co-founder of wealth manager SCM Direct, accuses them of labelling products as ‘socially responsible’ when a big chunk of their underlying holdings are anything but. He says buyers of such services, typically labelled as ESG – Environmental, Social and corporate Governance – are being cheated.
He told The Mail on Sunday: ‘If an investor buys an ESG fund or portfolio service – or for that matter an ethical fund – they have a right to expect that all the assets held within it were selected for their ethical and socially responsible attributes. Sadly, this is not the case.’
‘Socially responsible’: Investment groups that have jumped on the ethical bandwagon offering portfolio services and funds that do not fit the bill
Research conducted by SCM Direct shows that some products have more than 50 per cent of their assets in non-ESG securities or funds.
Socially responsible investing has become one of the most popular ways of getting into the stock market in recent years, as investors become more aware of the impact businesses can have on global issues such as climate change, pollution, fair pay and employment rights. In theory, only companies that strive for best practice – be it in products or services they offer or the way they treat employees or suppliers – make the ESG grade.
Some £25billion is now invested in such funds in the UK and financial advisers have seen a rise in demand from clients wanting their money to be invested this way.
Wealth manager Nutmeg says one in five investors is now considering socially responsible investing while a third said they would stop investing in a firm if it was not adopting sound ESG principles – even if it meant forgoing higher returns.
Investor interest has spawned a splurge of new funds and portfolio management services with various labels – ‘ethical’, ‘socially responsible’, ‘sustainable’ – and they often come with higher fees than traditional investment products.
Late last year, Miller published a hard-hitting report into the industry, saying many investors were being taken for a ride. ‘Whether it’s deliberate or accidental,’ he said, ‘clients who wish to satisfy their twin goals of investment return and having regard for the planet and society are being taken advantage of.’
Stating that many managers were doing no more than ‘green-washing’ – marketing funds as eco-friendly when in fact they weren’t – he called upon the City regulator to conduct an ‘urgent review’.
This time around, he has investigated the growth in ESG portfolio management services provided by many leading investment houses and ‘robo’ advisers – which select funds using algorithms and are bought directly by investors.
The portfolio services are commonly used by financial advisers dealing with clients who want all their investments managed in an ethical or ESG-friendly way. Money is allocated across a range of investment funds with an ESG slant.
His research indicates that in some instances, such portfolios are ‘stuffed full of plain vanilla funds that do not appear to have any ESG tilt or bias’. He says: ‘In any other field apart from fund management, the providers of such services would be prosecuted under the Trade Descriptions Act. But thanks to a regulator that turns a blind eye to virtually any form of unethical behaviour, these companies will never face a fine or reprimand.’
The biggest issue, says Miller, centres on ESG portfolios offered to investors who do not want to take too much risk with their wealth.
Often labelled ‘cautious’ or ‘conservative’, these portfolios have a concentration of assets in bonds rather than shares. But rather than invest in ‘green’ bonds, ‘social impact’ bonds or corporate bonds with ESG credentials, some invest in basic UK or US government bonds. Such government bonds, says Miller, may well be used to raise money for positive activities, such as healthcare and education, but they also provide funds to be spent on arms – a no-no for most ethical investors.
On that basis alone, he says their inclusion in an ESG portfolio is indefensible. The SCM Direct Ethical ESG Portfolio does not invest in government bonds.
Miller adds: ‘Governments worldwide are involved in many activities that ESG managers would automatically screen out if choosing appropriate equities and bonds to invest in. Typically, they exclude defence stocks, companies involved in alcohol, tobacco, gambling and the nuclear industry.
‘Yet governments routinely finance military activities, receive large amounts of their income via taxes on tobacco, alcohol and gambling – and often operate nuclear power plants. So, it cannot be right as an ESG manager to include government bonds in a portfolio.’
Miller is not a lone voice. Adrian Lowcock, a chartered financial planner with investment platform Willis Owen, says he ‘struggles to see how a socially responsible investment fund can invest in US or UK government bonds’.
He adds: ‘These bonds raise money for the government to spend and the investor has no choice as to how the money is allocated. So if 10 per cent of government spending goes on defence, then 10 per cent of an investor’s money is being used to support this. The nature of government means the bonds they issue cannot meet socially responsible investing targets.’
The box above shows a number of funds or portfolio services where exposure to such government bonds exceeds 20 per cent. It includes responses from providers as to why such bonds are held. Miller calls these ‘intellectually disrespectful and duplicitous’, adding: ‘Investors expect all investments in an ethical portfolio to be selected on ethical or ESG criteria.’
Ethical funds that invest in government bonds, he says, should be appropriately labelled – for example ESG Tilted or ESG Lite.
On Friday, the Financial Conduct Authority said it had its ‘eye’ on the appropriate labelling of ethical funds and portfolio services.