Research house Lonsec has partnered with an environmental, social and governance-focused data provider to enable advisers to assess the social and environmental sustainability of their clients’ investments.
Through a partnership with data provider Sustainable Platform, Lonsec will continue to assess fund managers’ processes against the principles of responsible investing as part of its investment rating, however will also introduce a new rating to go beyond ESG labels by analysing the underlying products and services provided by the companies in their portfolio and their compatibility with the United Nation’s 17 Sustainable Development Goals (SDGs), according to a statement.
Lonsec’s new sustainability ratings and reports will be made available through its iRate platform, allowing advisers to understand how their investment decisions line up against the UN’s 17 SDGs, while demonstrating to their clients how their advice fits with their values and preferences.
“There’s a growing desire among advice clients for investment solutions that don’t just take ESG factors into account, but put their money where their mouth is and actively consider the broader social and environmental impacts of the holdings in their portfolios,” said Lonsec chief executive Charlie Haynes.
“Part of the challenge is giving advisers and their clients access to the right information. At the moment there’s a real lack of transparency that makes it difficult for investors to understand exactly what they’re investing in.”
Lonsec noted that while ESG investing has entered the mainstream, it doesn’t always result in outcomes that clients expect.
Traditional ESG incorporates these factors into the investment process, but it doesn’t necessarily exclude unsustainable activities – or favour sustainable ones, according to the research house.
Further, it added that most ESG approaches allow the investment into ‘unsustainable’ companies if the ‘price is right’ or corporate engagement is deemed to be positive, which it said does not necessarily align with investor expectations.
“Lonsec is a strong advocate of incorporating ESG into the investment process, but given the broad range of ESG approaches used by managers, it’s important that investors are aware of what it means for their own portfolio,” said Lonsec head of sustainable investment research Tony Adams.
“The risk of ESG investing is that it can result in a ‘greenwashing’ of portfolios. Investors might see an ESG label and assume that it’s only investing in sustainable activities, but this is almost certainly not the case.
“You have to dig deeper to understand how the investment manager defines ESG, how they use it in their investment process, and how it impacts the final portfolio outcomes.”
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