Deep Dive: Identify genuine commitment to ESG Investment WeekDeep Dive: Identify genuine commitment to ESG Investment WeekDeep Dive: Identify genuine commitment to ESG Investment Week
Impact Investing Forum 2022
London. April 28-29, 2022.
The Global Sustainable Investment Alliance published its fifth biennial market review in 2020. Global assets under management (which take into account environment, social, and governance (ESG factors) in portfolio selection and management at the end 2020, was $35.6trn. This is a 15% increase from the 2018 review. It is not surprising that there has been an increase in the number of collectives which incorporate ESG factors into their investment process, or follow a specific sustainability mission. Investors with assets worth $29 trillion demand that 1,600 firms set science based climate goals. Some funds may be repackaged as ESG mandates. However, many others were designed from the beginning to reflect a variety of ethical and sustainable objectives. According to MSCI ESG Research there are more than 1,600 UK-domiciled funds which reference ESG criteria in their published investment policies. This will cover a wide range of approaches, from the integration ESG data to manage financial risks to detailed, values-led strategies that address a specific social or environmental problem. It can be difficult to find providers who have a genuine commitment and the expertise to implement sustainability with so many products and options. There is a risk that funds may not live up to their sustainability and ESG promises across all of their offerings. Investors need to be able to evaluate the offerings of each fund in order to choose the best option, especially if they are trying to meet certain ESG and sustainability requirements. One example is that almost all of the 1,600 funds that have integrated ESG considerations in their management hold at least one company, past or present, that is subject to severe ESG controversies according to MSCI’s rating system. This could not be a problem as it could be one company that is otherwise in good standing but has an isolated incident in one of its operations. Investors may have different opinions about what constitutes a’severe controversy’. Good COP or poor COP? An overview of previous summits. But perhaps more concerning is the 19% exposure of ESG funds to companies that are in violation of the UN Global Compact principles. These are ten principles that have been derived from international standards like the Universal Declaration of Human Rights. They set minimum expectations for responsible business practices. ESG performance can be affected if one or more of these principles are violated. We can also consider exposure to what are sometimes called the’sin stocks’. These include activities such as gambling, tobacco, alcohol, pornography and armaments. These are areas that ethical and sustainable investors would prefer to avoid, but many ESG funds have exposure through their holdings to one or more of them. There are many factors to consider when looking at collectives from an ESG perspective. For example, a climate fund might still contain oil and mining companies. It is important to fully understand the strategy of the fund and how it is applied. Examine the fund’s holdings. If any are controversial or not in line with the fund’s ESG strategy ask the manager. Meet with fund managers to find out their views on ESG and sustainability. Discuss your/your client’s sustainability goals. Kate Elliot heads research at Rathbone Greenbank Investments