Lonsec helps investors through the ESG maze

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Lonsec has partnered with specialist data provider Sustainable Platform to enable its research users to assess the social and environmental sustainability of their clients’ investments.

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 Environmental, Social and Governance (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).

Lonsec said this will help financial advisers select genuinely sustainable products that are aligned with their clients’ values.

“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 CEO 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.”

According to Lonsec, 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. Most approaches allow the investment into ‘unsustainable’ companies if the ‘price is right’ or corporate engagement is deemed to be positive. This 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 Tony Adams, Lonsec’s Head of Sustainable Investment Research.

“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.”

Lonsec’s new sustainability ratings and reports will be made available through its award-winning 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.

“We’re excited to be able to offer this new capability in partnership with Sustainable Platform,” said Mr Haynes.

“Our iRate platform is more than just research. It gives users the tools to create tailored portfolios based on a range of qualitative criteria that now includes the proper delineation between responsible investment managers and sustainable investments.”

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