From exclusionary screening to SDGs, the world of responsible investment is awash with jargon, buzzwords and acronyms. One of the worst offenders, according to Quilter Cheviot Investment Management’s head of responsible investment, Gemma Woodward, is the blanket use of ESG (environmental, social and governance).
“It has become a catch-all term that oversimplifies the complexities of ethical investment,” she says. “People have become lazy about what ESG actually means and how it is used. When people talk about an ESG company or an ESG fund, what do they actually mean? Are we just ticking some random boxes?”
When thinking about ESG factors as part of the whole responsible investment process, it’s not just environmental, social and governance, Woodward argues. “You’ve got stewardship and integration. You’ve got screening, sustainable and impact investing, and other broad categories. But ESG has just become shorthand for all of this. This is where misconceptions and misunderstandings occur, because what you think as being appropriate for your requirements from a responsible investment perspective are distilled down to this one term. If you call something an ESG fund, it could be doing a whole variety of different things. The term is too basic.”
Ultimately, it is clients – charities and their trustees – that will struggle, says Woodward. “It gets more difficult for the end consumer to know what they should want. What are they supposed to be looking for?”
Woodward says she is not alone in this thinking and that the more experience you have in the sector, the more you become aware that this type of blanket term fails to appreciate the nuances involved. “There have been many iterations of responsible investment. If you are new to it, then ‘ESG’ is the kind of thing that captures the imagination. But often the end consumer still doesn’t know what it means. We need to get so much smarter and precise about our language.”
Engagement and awareness
In a recent survey of its client base, Quilter Cheviot found that respondents consider stakeholder voting and corporate engagement as low on the scale when it comes to key priorities of responsible investing. This highlights a misconception of how the industry and the goals it is trying to achieve, says Woodward. “The engagement aspect of what we do is incredibly important, but that is not necessarily how it gets portrayed by the industry because it is long-term, complex and cannot be put in a nice little box or summed up in a neat little phrase. The financial services sector has become very lazy in explaining what it is we do and our purpose.”
So, what efforts are being made to address this? Internally, Quilter (Quilter Cheviot’s parent company) is looking at the terminology it uses, and refining its language. “We are going through that process,” says Woodward. “But it is hard to standardise the language across the entire organisation.”
The investment management company will be engaging with its clients over the next two years, and on an ongoing basis, to determine more clearly their responsible investment preferences, and what they want to achieve. This will not only help Quilter Cheviot to gain insight, but it will also increase awareness and understanding among clients of what is involved in meaningful responsible investing.
Woodward explains: “This is not just about taking into account ethical considerations or positive inclusions, which we have always done as part of our sustainable investment strategy, but this is a way of laying out our stewardship approach to our clients and integrating ESG factors within the investment process.”
Expectations and ratings
Another area that Woodward believes over simplifies responsible investment is expectations around fund ratings. “If an investment manager uses one external data provider, often it will have inherent biases. It will look through your portfolio and chuck out a number or letter based on sustainability, which will almost certainly be better than the benchmark. But that rating is literally based on that provider’s data; it doesn’t take into account any other research.”
To combat this, Quilter Cheviot uses multiple data providers and has its own research teams, which are charged with considering ESG factors within the investment process. This takes into account aspects such as voting, qualitative assessments and quantitative data dashboards.
“We don’t want to just give clients a number; it is too simplistic because it does not take into account the many aspects of stewardship. A number may make you feel good that you are beating a benchmark, but it is not a true reflection of what is going on and is meaningless.”
What we do
Quilter Cheviot is a leading investment management company specialising in helping charities and private clients with their investments. The ethos of our business is built on the premise that ‘the people you meet are the people managing your money’. This is to ensure that the discussion we have with clients and the implementation of the charity’s investment strategy is seamless.
We offer charities a number of different approaches to responsible investment including stewardship, ESG screening and ESG integration. Additionally, we have a strong educational programme which covers a wide range of investment and non-investment topics.
Fast facts
- Established 1771
- Won more than 20 awards in the last two years
- Gained 5* ratings Defaqto every year for the past six years
*All figures as at 1 March 2022
Gemma Woodward is Head of Responsible Investment at Quilter Cheviot Investment Management
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