One of the most significant trends impacting managed funds and investment management has been the trend towards ESG - otherwise known as Environmental, Social & Governance, or more broadly, RI or Responsible Investment. According to some sources - particularly those who are strong advocates of the cause - 83% of investors consider ESG or RI to be a significant factor in their invest decision or choice of a managed fund. That may well be the case, but finding funds that meet an individual investor's requirements is anything but simple.

It's not only because the research required is complex and detailed. One difficulty comes from the fact that even the experts agree there's no clear definition or standard when it comes to defining what is, or is not ESG or RI compliant.  The next challenge is that like beauty, ESG and RI "lies in the eyes of the beholder" - what suits one investor may not suit another. Let's take some examples:

Most funds marketed as ESG focused or compliant use a series of negative and positive screens - otherwise known as exclusions and inclusions. Generally exclusions (for example tobacco, weapons or mining of fossil fuels for energy) are easier to define as a hard or maximum limit can be assigned to the category. Therein lies one problem - what is the limit? Another dilemma arises where an industry has multiple stages between production and eventual sale. Finally, the same core product can be developed or used for different purposes, some undeniably "bad" and therefore on an exclusion list, while another derivative might be on an "inclusion" list.

Tobacco is a case in point: Few would argue that tobacco consumption is harmful. As such, most funds include tobacco production, cigarette manufacture, and distribution, as fully excluded. However, what about companies involved in the tobacco industry supply chain - such as packaging, advertising (where allowed) or transport/logistics? And finally, what about the retail distribution of cigarettes, even if hidden behind the counter at a large supermarket chain and only a small proportion of total sales?

The solution for most fund manager's is to assign either a full or partial exclusion to each category, and possibly to each element of the industry, based on the percentage of revenue a company makes from the activity, or even to allow investment in certain elements.

Another subjective area lies in uranium mining and the use of nuclear power, or products. Few, if any ESG funds permit investment in nuclear weapons, but the use of nuclear energy - and therefore a move away from coal or gas - as a source of electricity generation creates a choice for both the fund manager, and the investor. Less subjective is the use of uranium as a raw material in the development of products for nuclear medicine. Partial exclusion may resolve this, but some funds fully exclude uranium mining and downstream processing for any purpose, including medicine. This may not suit all investors' views or objectives.

Other "Negative Screening" categories suffer the same issues: Weapons - particularly of a "controversial" nature such as land mines or chemical weapons, are normally fully excluded. However, how does the manager - or the investor - categorise a tire manufacturer that might supply - among their other other customers - the manufacturer of a military vehicle?

Fund managers are naturally cautious of being accused of "greenwashing*" whether by ASIC, or more generally. In some recent high profile cases, large fines have been handed out (and reputations damaged) when a manager has been proven guilty of greenwashing, even though the breach was unintentional. The complexity of the detail in a fund's ESG Policy increases the risk of the manager running foul of the law, as does the lack of a clear definition of what ESG or RI actually consists of.

ESGCheck attempts to overcome these issues by assigning a Full or Partial label to each fund's Negative Screening Category, with a brief description where possible. After that it is up to the investor or advisor to determine if it meets their interpretation or values - Beauty, or Beast?