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The Case For Impact Investing Over ESG-Labelled Funds

What’s happening? Fidelity International has removed the ethical filter on its website while it investigates claims it misled investors by presenting funds that did not meet necessary standards as being "socially responsible". Clients who used Fidelity's site to seek "ethical" investments may have been directed to funds that included tobacco, alcohol and arms companies, according to a study by wealth manager SCM Direct.

Why does this matter? SCM’s study didn’t single out Fidelity, noting managers accounting for £2tn ($2.6tn) of “ethical” investing were including problematic stocks in portfolios.

Asset managers, SCM said, are able to point to ratings provided by the likes of Bloomberg, Morningstar and Sustainalytics to bolster the ESG credentials of their investment products. A lack of standardisation and regulatory requirements, however, often means funds can include stocks from any desired sector.

SCM isn’t the first organisation to make this observation. In 2018, Asian investment bank CLSA noted FTSE rated Tesla as the worst automaker in terms of ESG standards. MSCI rated it the best, while Sustainalytics had it languishing somewhere between these two extremes.

Given the varying methodologies to compute ESG data, investors can’t rely on labelling or ratings to guarantee their holdings comply with sustainability mandates.

An alternative to ESG-labelled offerings may well be to actively seeking out impact investments. Not only is this area gaining popularity (particularly among younger clients) but, provided there is adequate transparency, investors can see how their capital is being put to good use.

Nick Finegold is Founder & CEO of Curation Corp, an emerging and peripheral risks monitoring service.