One way might be to look at funds as either thematic or impact funds. Thematic in this instance could be best described as investing in companies that are supplying solutions to specific environmental and/or social problems. Impact funds on the other hand invest with the goal of having a measurable impact.

Another solution DIMs could adopt is to invest in Index ETFs which aim to replicate their benchmarks with an ESG overlay. But care has to be taken here because the ETF provider will have their own ETF criteria which may be looser than the ESG standards applied by the DIM. Due diligence is key here.

Finally, the subject of ETFs brings us on to the subject of “investment tilt”. One of the problems with ESG investing is how to create an investment portfolio without compromising on investing mandates such as diversification and due diligence. Having already covered the due diligence element, we will now consider diversification.

ESG funds will favour companies with high ESG scores and accordingly will lean more heavily on certain industries and sectors than their non-ESG peers.

For example, a fund seeking to minimise exposure to polluters may naturally target cleaner industries such as technology and away from manufacturing.

In this way the investment arena can become condensed and accordingly the underlying investment options can be limited. As a result, diversification is also limited.

Fortunately for ESG, the performance returns so far have not inclined to be affected because the ESG strategies tend to weight high-quality, growthier-type companies than the index in which they sit.

Nonetheless the ESG approach does lead to a discernible investment tilt and this has to understood and accepted.

I think what is clear is that intergenerational advice and ESG investing are two topics that should not be ignored by Discretionary Investment Managers. 

Mark Greenwood is director of compliance services at The SimplyBiz Group