At ESGcheck we have unpicked and analysed literally hundreds of managed funds which fall into the broad church which constitutes an ESG or RI approach to investing. One thing our research and analysis has shown is that while they are all heading in the same direction, there are multiple different ways of getting there. Adding to the problem is that there is no clear definition of what does or does not qualify as ESG or RI. (See our article, "Beauty is in the Eye of the Beholder"). 

Many funds, as shown in our category tables, use what one can call a "Box-Ticking" approach, by "negatively screening" or excluding various industry and activity categories either fully, or partially, based on a revenue or percentage basis. That approach works particularly well when avoiding specific sectors or companies, but becomes less specific when approaching positive screening.

However, box-ticking is not perfect either, for a number of reasons, the main one being it can be overly rigid and prescriptive, which of course is why many analysts and research houses like the approach - it's either excluded, or included. In addition, many categories aren't clear cut, hence the partial category in ESGcheck's tables, which leads to the question "how partial does a fund's approach to a negative category have to be to quality as responsible or sustainable?"

The alternative to box-ticking is to take a broader, subjective approach, either on a sector, industry or company basis. Advocates of the subjective approach will argue it allows greater flexibility and discretion, and the ability to have an overarching goal, such as a specific carbon footprint target by a certain date, or adherence to a specific global climate or environmental objective, treaty or convention.

This approach also allows a fund manager to claim ESG status based on their approach to governance and advocacy, by using their status as a shareholder to try to influence the management or boards of investee companies to change what might otherwise qualify them for an exclusion under the box-ticking methodology. This approach is also open to criticism or abuse - particularly by very large funds, or super funds, who can skirt the need for negative exclusions by claiming to be pressuring management to improve their business practices, or divest or close a business or division.

Which brings us to the vexed question of "Greenwashing" the practice of claiming to be taking an ESG or RI investment approach, but failing to do so in practice. 

Box-ticking can be more easily monitored and reported on - particularly on the negative or exclusions side - thereby leaving the fund manager more open to claims of and therefore potential penalties for greenwashing. 

The subjective approach by its very nature can be more discretionary and flexible and therefore more difficult to define, and regulate.

To add to the confusion - and the dilemma for the investor and advisor - the resulting portfolios of two different funds, each taking the alternative approach, could end up holding the same investments!