Sustainable portfolios: which ESG ratings are best?

Trustworthy ratings from a central source give advisers and investors peace of mind

Sustainable portfolios, SDR ratings, SDR labels, ESG investing

​Sustainable portfolios: which ESG ratings are best?

​By Andrea Acimovic, ESG specialist, Elston Consulting

The best ESG ratings are those that are clear, robust and evidence-based.

It is perhaps inevitable that the launch of the Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements (SDR) – a set of rules obliging a business to provide clear and accurate information regarding the sustainability of its investment offerings – would give rise to differing opinions as to where lines have been drawn and on what basis categorisations have been made, but looking at the bigger picture, having a centrally-sanctioned labelling system in place is hugely valuable to the investment community.

From the perspective of a Financial Adviser, the system provides automatic evidence alignment, streamlining the decision-making process. Whether or not a product carries the SDR label, there remains a simple system of consumer-facing disclosure via a standard, 2-page document that outlines any sustainable aspects of a product in plain English. It saves an adviser from having to conduct their own time-consuming research, digging around ESG matters, and can give them confidence that what they are offering to their end clients is bona fide from a sustainability perspective. By their nature, advisers tend to have a whole-of-market view and this saves them from needing to become specialists in the niche area of sustainability rules, definitions and disclosures that can be opaque even to those equipped to analyse it.

Advisers will assess their clients’ sustainability preferences and recommend investments accordingly. But even if a client has no specific preference for SDR ratings, if a product has stated ESG characteristics it will still carry detail of the sustainability of holdings in the 2-page document mentioned above – it is a legal requirement of the fund provider.

The increasing regulatory burden placed on financial advisers means that any system that saves time while providing reassurance that a product can be trusted to meet the required credentials is valuable to both Financial Advisers and discretionary Managed Portfolio Services (MPS) providers alike. Fighting greenwashing is a stated aim of the FCA and insisting on the use of straightforward terminology when describing ESG attributes is part of this.

From our perspective as an investment solutions provider, it matters hugely that we are able to bring clarity and consistency to a decision-making process for advisers so that they can see what is genuinely sustainable as opposed to what is simply marketed as such.

In providing structure for categorising funds based on their sustainability objectives, the SDR framework constitutes an invaluable starting point. There are four labels: Sustainable Focus, for funds already meeting high environmental and social standards; Sustainable Improvers, for those on a credible path to improvement; Sustainable Impact, for funds aiming to generate measurable positive change; and Sustainable Mixed Goals, for blended strategies that still maintain high standards. Currently only about 140 funds have received an SDR label out of the thousands that claim ESG credentials of some sort or another.
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Leveraging the clarity afforded by the SDR ratings, we have been able to design a suite of five risk-profiled portfolios built entirely with SDR-compliant funds. The portfolios have been launched by Elston Portfolio Management and are monitored quarterly to ensure ongoing SDR compliance. This means advisers are able to use them confident in the knowledge that the holdings into which their clients are investing are genuinely sustainable. Looking to the future, if national regulators can continue to build on this, refining the ESG taxonomy, agreeing standards and implementing robust systems of disclosure, increased investor confidence will hopefully lead to greater investment in this important sector.