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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.