Robo-advisers not ready to offer ESG portfolios

Three quarters of investors interested in ethical investing but online providers bemoan lack of suitable products

BMO GAM

Industry commentators and providers are split over whether more robo-advisers should be offering socially responsible investing (SRI) options for investors.

Popularity for ethical investing has been rising, with research by Boring Money in July 2018 revealing that 75% of investors are interested or may be interested in these products.

More broadly, the Ethical Investment Research Services (EIRIS) estimates that more than £16bn is invested in ethical funds in the UK alone, with the global figure likely to be over $80bn.

Online investment adviser Wealthsimple, was one of the first to offer ethical portfolios back in January 2017, followed by Wealthify who jumped on the trend last month.

However, some providers argue that because there are no set requirements for robo-advisers offering ethical strategies, the industry is not yet ready.

No clear definition

Manuela Rabener, chief marketing officer and co-founder at Scalable Capital, says she has “several issues with ethical investing”.

She says that while she is of the fundamental belief that “it’s a trend for all the right reasons”, there is no clear standard that would define which companies should be excluded from a portfolio.

Rabener explains that the best solution for a client would be the ability to define individually which companies they would like to exclude from their portfolios – based on certain criteria for which sufficient transparency would have to be available from trustworthy sources.

This would go beyond just the products or services a company is offering to topics such as environmental impact or gender and race inclusion.

However, she argues that such a bespoke setup will certainly be possible through the use of technology at some point “but is not yet the status quo”.

She adds: “We also lack data to create the above-mentioned perfect transparency. It is challenging for our investment approach that there is a lack of a sufficient data history for ethical investing ETFs, as those products have at best been around for a few years.”

Likewise, James McManus, head of ETF research at Nutmeg, says: “What constitutes an ‘ethical’ strategy has no set definition and what makes an ethical portfolio for one provider doesn’t necessarily apply for another.

“What’s more, at the moment there’s no easy way for an investor to compare when they’re faced with a myriad of opinions. So their portfolio might not align as closely to their values as they thought.”

But Toby Triebel, CEO at Wealthsimple, disagrees.

He says: “The industry has 15-plus years of research on ethical investing which is clear on the fact that investors don’t sacrifice returns when invested in an ethical portfolio. In fact, there is some research that suggests ethical investing may drive better investment behaviour.

“If a person isn’t investing just for financial gain, but also for what they believe in, the investor may be less inclined to do things like pull out of a market when faced with market volatility.”

Jumping on the bandwagon

But, Bella Caridade-Ferreira, CEO at Fundscape (pictured), says robo-advisers not offering ethical portfolios are “missing a trick”.

She says: “There may not be huge demand at the moment, but before they know it will be much bigger and it will be too late to benefit. If I were an ethically-minded investor, I’d be looking at robos who were ethical from the beginning and not just when they were jumping on the bandwagon.”

Wealthsimple’s Triebel agrees.

Wealthsimple launched its SRI portfolio in North America in 2016 and in the UK in 2017, in response to growing demand from its clients to have investments aligned with their values.

“It comes down to whether a company wants to prioritise building an ethical offering and if it’s something their clients value,” he adds.

“For us, it was important that we listened to our clients’ requests and lived up to our value proposition by building a SRI portfolio that offered the same global diversification and long-term return characteristics that people enjoy through our standard portfolios.”

Constraints

Despite increasing demand for ethical investing, robo-advice providers remain sceptical.

The UK Sustainable Investment and Financial Association findings reveal that 49% of people in the UK want their money to be invested in initiatives that make a positive difference in the world.

However, Moneyfarm, which doesn’t yet offer SRI, says products need to be “suitable” first.

Richard Flax, chief investment officer at Moneyfarm, says at times ethical ETFs will cost slightly more than their mainstream peers, as well as having a limited range.

Flax adds: “The range of ethical products in equities is more broad, but very limited in corporate fixed income which is another constraint to consider. Most diversified portfolios will have some government bond exposure and we’re not aware of anyone ready to construct an ethical government bond ETF.”

Meanwhile, Oliver Smith, portfolio manager at IG, says: “While we applaud what ethical investing stands for, and support index fund providers taking a proactive stance with voting on ESG issues, we are not at present looking to offer portfolios with an ethical tilt.

“Building diversified ESG portfolios is difficult, caused by a shortage of investment products, which in itself is symptomatic of lower consumer demand in this space.”

While Wealthsimple’s Triebel has an SRI offering, he accepts it is a difficult thing to do.

“It’s just not that simple. You’ve got to have quite a robust research process in place to make sure you’re really delivering what clients would expect when they invest in a SRI portfolio.

“It’s very easy to say you have an SRI portfolio, but you need to look in detail what is actually in them.”

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