OPINION: Scrutiny, not sneers

Some years ago, I was invited to a pre-credit crunch jolly at Queens Club in London by a technology company.

Ahead of the tennis, during lunch at the famous River Café, my host expressed the view over a nice glass of Chablis that being ethical and green and stuff like that (slightly contemptuous curl of the lip at this point) was not compatible with being a good investor.

It was an old-fashioned view even then, and my host was not himself an investor but, like me, a parasite feeding on the sidelines of the investment industry. Nonetheless, he was the sort of person who bends with the wind, and so his remarks show how much things have changed since Lleyton Hewitt was a young tennis player (for I remember watching the Australian win that day).

In a sign of that change, Morningstar plans to launch the fund industry’s first environmental, social, and governance (ESG) scores for global mutual funds and exchange-traded funds (ETFs) later this year. The scores will be based on ESG company ratings from Sustainalytics, and the Swiss private banking group Julius Baer is already signed up as a client. 

Whenever I interview fund managers about responsible investment they bemoan a lack of standardisation in the sector – both in terms of fund labelling and measuring the social and environmental impact of ESG investment policies. Therefore the new Morningstar measures, which will take the form of asset-weighted composite ESG fund scores based on company-level Sustainalytics ESG ratings, are surely to be welcomed. 

According to the Chicago-based research firm, the new scores will for the first time allow investors to compare funds across categories, relative to benchmarks and over time using ESG factors. Investors will also be able to separate the data out to see individual scores for the ESG pillars.

All the indications are that such measures are both wanted and necessary. A survey undertaken in February 2015 by the Morgan Stanley Institute for Sustainable Investing showed that 71% of investors were interested in sustainable investing, with this figure rising to 84% for the millennial generation. However, this interest does not always translate into action, although nearly 72% of individual investors surveyed believe that companies with good ESG practices can achieve higher profitability and are better long-term investments.

“While individual investors recognise clear business advantages for companies with a focus on sustainability, they do not fully translate this into advantages for investors,” says the February report. “Individual investors are divided over perceptions of sustainability and financial gains being a trade-off (54% versus 46%).”

In this context, it is perhaps important to remember how powerful are the vested interests that would prefer us all to smoke ourselves silly, buy cheap clothes produced in sweatshops and drive around in gas-guzzling vehicles polluting our one and
only planet. 

Share Action, the movement for responsible investment, highlighted one ruse in a recent investor briefing. The briefing was based on research conducted by the Policy Studies Institute (PSI) at the University of Westminster, which showed how several major EU trade associations had actively lobbied against climate change mitigation, although many of the publicly owned companies that are paying members of these trade associations have called for a strong international policy framework to combat climate change. 

“For investors to effectively scrutinise the risks that corporate lobbying may pose to their portfolio companies, there is a need for greater transparency on the alignment of companies’ climate position with those of associations supported through membership or other means,” says Share Action. 

In other words, investors really cannot scrutinise companies enough. We’ve come a long way since the days of Chablis-soaked sneers, but there’s still a long way to go. More transparency, please, more data – and more measures such as the planned Morningstar scores.

Fiona Rintoul is editorial director at Funds Europe

©2015 funds europe



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