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There is general agreement that greater availability of responsible investments is a good thing. According to data from Morningstar, by the end of 2018 UK investors had 31 more ‘socially conscious’ ETFs and 16 more socially conscious open-ended funds available to them. In both the institutional world and the retail space, investors and their advisers feel that a widening product set goes hand in hand with greater adoption, as funds that compete strongly on performance as well as tick certain values-based boxes come to market. It is also becoming easier – albeit still not easy enough – to populate an asset allocation framework with decent responsible investment options.
But we can’t assume that all new funds are high quality. How many are underpinned by robust, well thought-out and supported ESG and/or impact screening and measuring processes? Even where fund managers are well-intentioned and try to do everything right, they may be relying on company data that is selective or inaccurate.
How do you spot a ‘greenwashing’ fund? Here are six tell-tale signs for professional investors to look out for, and asset managers to avoid:
1. What the responsible investment spokesperson says evidently has no bearing on what the fund managers do. The two parties should be communicating, with investment teams incorporating the knowledge or tools provided by the internal responsible investment specialist/team
2. The firm talks a lot about the merits of ESG integration, but only applies it to one fund and appears to have no concrete plans to roll it out more widely. If you truly believe considering ESG factors is just good investment sense, why confine it to a single product?
3. Looking under the bonnet, there are some surprising stock picks. While there is no single interpretation of what good looks like in positive and negative screening and views on this can be very subjective, a fund badged as sustainable but heavily invested in Shell and British American Tobacco may have some explaining to do
4. Stewardship efforts are limited to voting at AGMs. Effective engagement involves considerable analysis of company activities and decisions, as well as ongoing monitoring of, and interaction with, company management. This can be a daunting undertaking for a fund manager – it really requires multiple bodies in-house or the help of third-party stewardship services
5. There appears to be heavy reliance on third-party ESG ratings, with limited internal qualitative analysis. A company with staggering carbon emissions can sometimes get a relatively good ESG score based on its capacity for detailed reporting and the metrics it chooses to use e.g. a ratio of emissions to earnings
6. Reporting on impact falls short under scrutiny. The UN Sustainable Development Goals provide a neat framework for funds managers aiming to achieve positive impact. Yet calculating positive and negative impact of companies’ activities and products or services is extremely complicated, especially if you consider the whole supply chain. Those who do this well often enlist the help of academics
The consequences of greenwashing should not be understated. At best, suspected greenwashing means funds are overlooked. More problematic is an ill-conceived sustainable fund attracting significant investment, only for investors to find that they are exposed to areas they were really trying to avoid. This can blow up in the face of the adviser and ultimately, the asset management house.
For our Responsible Investment Review report, we have interviewed over 60 experts, including around the topic of tools and methodologies fund managers rely on to construct ESG funds, and what investors who are keen on aligning their investment with their values of beliefs might expect. For more on benefits and downsides of different ESG research processes and to find out more about the report, please get in touch with the team by email here.
It is almost 8th of March, or International Women’s Day – a time when everyone from brands to publications, NGOs and other organisations show their support for female empowerment and draw attention to the hardships still faced daily by women globally. We think talking about women’s issues at a cultural level has given rise to some fantastic initiatives, but what is often missing is more serious engagement with women in investment (and the financial services industry in general), an undertaking that has the power to make material and lasting change happen. There are two angles here, one being women’s participation in investment (and more specifically, responsible investment, whether it is ESG-screened or billed as sustainable) and the other being more women being invested in via responsible investments that get us closer to gender equality (one of the United Nation’s Sustainable Development Goals, no less). Both are growing.
The latter may mean investing in companies that emphasise putting more women on company boards, supportive employment policies around maternity leave and flexible working, or focus more on working conditions of women along the supply chain. There is now a range of freely-available tools for investors who want to align their values with their investments (from a gender equality perspective). One such tool is Gender Equality Funds, a search platform that enables users to look up investment funds that score well on gender balance and gender equality policies. The funds are rated using a combination of Morningstar and Equileap data, and with the help of As You Sow, an NGO dedicated to promoting CSR through shareholder advocacy. The tool is US-based for now, but responsible funds that make gender equality at least part of their mandate have ben widely available in the UK for a few years now.
Of course, the issue of women in investment (and more broadly in financial services) is already interesting in and of itself due to the nature of the investment world, which is one of the most male-dominated. Where pay gap reports have been published, with Hermes being one of the first to do so, the gap was revealed to be as significant as 30%. Other financial services firms reported similar, or higher, pay gaps. The disparity is in part because of the high proportion of women in lower-paying roles (entry level or administration rather than investment management), while the most senior roles see lower turnover and generous bonus packages. So even where firms have tried to improve the gender balance through hiring practices, change is slow to filter through.
Sometimes it is a vicious cycle: an industry is regarded as male-dominated and it deters women from working in it. Technology, engineering and the political sphere all face this problem. Some financial services firms are now actively trying to shift perception. In February, for example, Rathbones hosted 10 young women as part of the Lord Mayor’s Appeal ‘She Can Be’ event. They got to be investment managers for a day and in the process, found that a financial services career path could be more accessible to them than they had believed it to be previously.
On the advisory side of things, Research in Finance researchers typically conduct interviews with men. Yet when we interview or moderate groups of paraplanners, the gender (and age) balance is considerably more diverse. These individuals are armed with professional qualifications and often ambitious to climb the career ladder. Ultimately, the next generation of advisory firms looks set to be more female.
While conducting research for the Responsible Investment Review, financial advisers we spoke with told us that they were slightly more likely to be asked about responsible investing by women investors. The former, they said, were more likely to take a stand in trying to avoid investing in tobacco or companies with sub-standard practices or disclosure. Moreover, our survey of 1,001 private investors found women to be significantly more likely to express an interest in responsible investing, having been provided with a basic description of this and ESG specifically. Female investors are also more likely to rate a range of approaches to responsible investing more favourably than male investors, from ESG integration to investing in ‘themes’ such as renewable energy and positive impact investing.
Not only is gender equality considered one of the main criteria included in the very essence of ESG; women are also starting to feel like they have some ‘skin in the game’. Wanting to change the status quo is another reason why responsible investing may strike a chord with female investors and City professionals. Perhaps it is, as Investment Week puts it, a ‘meeting of movements’ between ESG and the broader ‘women in investing’ commitments and initiatives. And let’s not forget that more and more working women are actually emerging as the money managers and decision makers in their respective families, which is true both in the UK as well as at a more global level to varying degrees.