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How sustainable is your ESG fund?

08 June 2021

4 minute read

The value of an investment is no longer just about the return. An increasing number of investors want their money to make a positive impact on society and the world at large. Here, we consider what it means for an ESG fund to be sustainable.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • The difference between environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing funds
  • What ESG impact you can have as an investor
  • What ESG funds are available on the Barclays Funds List.

While environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are terms which are often used interchangeably, distinct differences exist. What this means for you is that there is invariably something for everyone.

What’s the difference?

ESG looks at the company's environmental, social and governance practices, alongside more traditional financial measures. Socially responsible investing involves actively removing or choosing investments based on specific ethical guidelines. Impact investing takes a more active approach by investing in companies with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.

Be warned, however, that while some fund managers aim to invest in companies that meet, or are aiming to meet, some or all of the UN’s Sustainable Development Goals (SDG), there can be instances of ‘greenwashing’ – where companies convey a false impression or provide misleading information about how environmentally friendly their operations are.

Fund managers may also indulge in greenwashing themselves, and say that ESG considerations have a greater role in their investment decisions than is actually the case. Investors should remain wary of some of these claims and ensure that their money is invested in exactly what they want and expect.

Investors can find out more information about a fund by accessing the fund’s annual impact report (where available) – one such example may be the Barclays Multi-Impact Growth Fund Annual Impact Report [PDF, 2MB].

Not all are equal

It’s important to be aware of a crucial difference in terminology when discussing ESG funds. For example, some funds are considered to be ‘dark green’. These funds screen out stocks that do ‘bad’ things, such as human rights abuses, dealing in weapons, or selling tobacco products for example.

However, a number of ESG funds are more flexible. These types of funds will buy stocks that do things that are harmful to the environment (e.g. drilling for oil) but are making efforts to improve the way they work. In these instances, the fund manager will typically try to engage with the companies to encourage them to make the changes needed to become more environmentally considerate. All the ESG funds on the Barclays Funds List aim to engage with their underlying businesses – some more than others – and it’s something which has gained more prominence in recent years.

Most fund managers now believe that ESG risks (which include those related to climate change impact mitigation, environmental management practices and duty of care, working and safety conditions, respect for human rights, anti-bribery and corruption practices, and compliance to relevant laws and regulations) are as meaningful as financial risks.

For this reason, fund managers may often speak with the Chairman or senior directors of listed businesses to ensure that the amount and the way that management gets paid is fair, and linked to how well the company does for its shareholders in terms of ESG risks. If the company executives are not meeting their ESG objectives, fund managers may have the ability to influence their bonuses or ultimately sack them.

Further information on the specifics of ESG funds can be found in the fund prospectus and Key Investor Information Document (KIID).

Shades of grey

ESG investing is not black and white – there are many shades of grey. Some companies can be very good in their sector, but operate in sectors with bad reputations (e.g. clothes making factories). In addition, it’s important to note that the transition to greener energy still requires potentially environmentally damaging mining to produce certain metals, such as cobalt, or lithium which is used in electric car batteries for example.

Investors should be aware that funds invest in companies that could be perhaps considered ‘leaders’ in ESG matters, but others will invest in those that are improving their ESG credentials. Also, many ESG funds will invest in what could be described as ‘the best house on the worst street’. So, they may invest in the clothing maker that is best at treating staff fairly for example, but the overall sector itself may not be thought of as a particularly ‘strong’ ESG sector.

What can you do?

For the majority of the time, investing in an ESG fund allows the fund manager, as a shareholder, to potentially have an impact on underlying company behaviour, through voting and strong engagement, to drive companies – and the economies in which they operate – to try and meet long-term climate and ESG objectives.

What is key is thinking about what is important to you individually before investing. Your investment may help to shape the future of the planet. So, do you want your money invested in companies that are already regarded as the best managed or for the way they treat the environment, or do you want to invest in those that are making serious steps to improve?

Where to invest?

ESG funds have been a huge success story of the last two years, capturing investor imagination and enjoying significant inflows, according to data from Calastone1. The big challenge for active funds today is knowing how to differentiate their products from index trackers – ESG is proving beneficial in pursuit of this aim.

If you want to learn more about sustainable investing, visit our ‘What is ESG investing’ page.

There are a number of funds on the Barclays Funds List that focus on ESG, such as the Jupiter Ecology Fund, BlackRock Sustainable Energy Fund, and the Janus Henderson Global Sustainable Equity Fund. Find out more information on these funds.

If choosing the right fund for your portfolio is a challenge – with products investing in all kinds of areas you’re unfamiliar with – another product you might consider is the Barclays Multi-Impact Growth Fund. This fund is an award-winning2 ‘fund of funds’ meaning that it doesn’t directly invest in companies but invests in a selection of other specialist funds which Barclays’ experts consider to be ‘best in class’ impact funds.

Take a closer look at the Barclays Multi-Impact Growth Fund.

To diversify your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Past performance of the fund and its manager are not a reliable indicator of their future performance.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

Correct at the time of publishing.

Plan & Invest is a service which creates and manages a personalised Investment Plan just for you. Whether your long-term goal is your child’s university education, retirement or just building a nest egg, all you have to do is tell us a bit about yourself and then, if your application is successful and you’re ready to invest, let our experts select and manage your investments (minimum investment is £5000).

Read the Assessment of Value report [PDF, 683KB] for funds run by Barclays.

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