The following update from JM Finn, our investment managers, sets out how they select their ESG funds.

What is ESG?

Environmental, Social and (Corporate) Governance Criteria refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business. Other terms to describe this type of approach include sustainable, green or ethical investing. These are broad terms used to describe any investment strategy, which seeks to consider both financial return and social/environmental good to bring about a positive change.

Investment houses adopt their own individual parameters and process for ESG investing. Some will apply a negative screen whereby they seek to avoid a pre-determined list of controversial activities. This may be done by excluding companies which generate more than a certain level of revenue from an activity, or they may apply a blanket exclusion. Some actively engage with business leaders to try to engender positive change, and this may require investment into businesses where potentially controversial activities occur, but where improved business practices can lead to value creation for shareholders. Some prefer to follow a positive or thematic approach, seeking to invest only in those businesses providing solutions to potential ESG issues, and in these instances there may not be an explicit exclusion policy in place.

 

Our approach

At JM Finn, we believe that there is merit in each of these various approaches and we look to incorporate a blend of the best in each class within our ESG collective portfolios. JM Finn’s ESG collective portfolios only invest in ESG collective investment schemes, which are exchange traded funds, unit trusts and investment trusts.

 

How is the universe determined?

Research is undertaken by our sector specialist Isabel Kwok (based in Bristol). She maintains a universe of funds that she monitors that include the following criteria:

Funds with AUM of £50m + or funds that are held by J M Finn already

Funds with a long-term track record (typically 3+ years)

Funds with a sustainable, ethical or responsible mandate (see above)

We are not prescriptive in the individual process of the investment house or the fund and prefer to blend a variety of ESG mandates, such that a portfolio might include one or more funds that:

apply a negative or positive screen

engage with companies to improve their impacts

invest in sectors which broadly have a positive impact (e.g. renewable energy)

 

How are funds selected for client portfolios?

Our approach to selecting investment funds is a demonstrable process consisting of a quantitative screening of the fund universe to determine a core list of funds, which are then put through our qualitative due diligence process on an ongoing basis. This is generally via regular manager meetings and analysis to ensure that the manager is staying true to the stated investment mandate. Funds, both passive and active, are selected from this preferred list for client portfolios.

Whilst we aim to include only those ESG funds we consider to be ‘best in class’, each fund mandate follows its own pre-determined investment process, where full holdings lists may or may not be made public, therefore we cannot guarantee to exclude specific direct equities or activities for our clients. Furthermore, where fund managers are actively engaged with businesses, investment may be necessary in order to facilitate active engagement with business leaders to bring about change.