Square Mile’s decision to separate ESG factors from responsible investing in its ranking system will help cut through confusion but some say the ratings will still probably require tweaking over time.
The research and consultancy house confirmed on Monday it would be bringing in ESG integration scores across its analysis of asset managers and individual funds within its Academy of Funds. Fund groups and funds will receive a score from 0 to 3 depending on how integral environmental, social and governance factors are to their investment process.
In addition, the team has rolled out ‘responsible’ ratings, which pick out individual funds it feels confident can deliver on their stated objectives of sustainability, excluding harmful companies from portfolios and/or creating a positive impact.
Both the ESG scores and responsible ratings are live on Square Mile’s website as of today.
Square Mile director of research and consulting Victoria Hasler (pictured) said the team felt it was important to distinguish between ESG and responsible investing to help alleviate confusion among advisers.
“The more we talked to people about it, the more we realised that there was an awful lot of confusion in the market, different people doing different things, using the same terms to mean different things, a lot of language used interchangeably,” said Hasler. “And really I think for a lot of our clients, they were keen to get some guidance.”
Important distinctions
Commentators were supportive of Square Mile’s initiative to separate out ESG factors from other types of responsible investing and hopeful this would reduce confusion among advisers and consumers.
“There are so many gaps in knowledge and information in this field that I welcome pretty much all new launches,” said founder of SRI Services & Fund Ecomarket Julia Dreblow.
“My view is that we need to have as many different ways of cutting through ESG and sustainable investment information as there are methods in the ‘non-ethical’ market – so welcome on-board Square Mile.”
Whitechurch head of SRI and investment manager Amanda Tovey added: “I do think defining the difference between funds which incorporate ESG and badge themselves as such and funds which also consider exclusions and/or positive impact is important and should provide better clarity to advisers and their clients.”
‘It’s already a confused space’
On whether Square Mile’s ratings would have the desired effect on advisers and their clients Dreblow said most projects like this tend to “take a little while to settle down” and it would likely need to be tweaked over time based on customer feedback.
Square Mile commercial director Steve Kenny said settling on a general umbrella term like ‘responsible’ for its non-ESG fund ratings rather than having individual rankings for impact, sustainable and exclusion reflects calls in the industry for clarity and a common language across the space.
The Investment Association launched a consultation in the beginning of 2019 to come up with agreed standard definitions, as well as to do a ‘stock take’ of reporting frameworks to make ethical investing easier for consumers.
Kenny said the team felt that having three separate rankings would be even more confusing “and it’s already a confused space.”
Opting for a broader ‘responsible’ category also allows for the possibility that funds will be evaluated using other criteria further down the line as the industry continues to evolve.
“This is a very evolving space at this moment in time because I do think it has captured the imagination of the consumer,” Kenny said. “Now a lot of groups would say it’s captured the imagination, but not the pounds yet. But I do think that this is starting to turn and there is a genuine momentum in this thing.
“I think it was important for us to come into this space at this moment in time, to give that clarity at a time when I do genuinely believe it’s going to take off and help ensure that advisers are able to get the right type of solutions for their clients.”
18 funds awarded responsible ratings
At launch only 18 funds out of 317 in Square Mile’s Academy of Funds have responsible ratings.
Five of those funds, including Liontrust Monthly Income Bond and Trojan Ethical Income, enter the ‘Academy’ for the first time.
The responsible ratings are directly comparable to those carried by other funds ranked by the research group, given a score of A, AA, AAA, P+ (Positive Prospect) or R (Recommended), they also reflect those funds which explicitly aim to have a positive impact on society or the environment or where such an element is present in their mandate, as well as offer attractive returns.
Stewart Investors is the most decorated fund group thus far, sporting a total of five funds in the responsible ratings including the only two funds that in the AAA category.
Two passive funds – Vanguard SRI European Stock snd Vanguard SRI Global Stock – are Recommended.
