Is your ESG manager any good?


Panel discussion, hosted by Cherry Reynard, with:
Jake Moeller – Senior Investment Consultant, Square Mile
Ben Constable Maxwell – Head of Sustainable and Impact Investing, M&G Investments
Toby Gibb – Global Head of Investment Directing, Fidelity International

One of the thorniest issues for advisers has been how to measure ESG, impact or sustainable fund performance and then explain that performance clearly to clients. There is the complexity of explaining non-financial performance and whether a fund group is doing ESG ‘well’, but also the nuances of ESG financial performance, its skew to specific sectors and its strength or otherwise in different market conditions.

The first problem is that ‘doing good’ will mean different things to different people. Clients investing in ESG will have an expectation of the type of companies held in their portfolio and this may not match those actually held in the portfolio. This is particularly difficult for ‘engagement’ portfolios. It may be difficult to explain to a client that the oil company they hold, for example, is the ‘best in class’.

It doesn’t help that, as yet, there are no standard definitions for fund groups, so it is possible to claim ESG credentials on relatively flimsy grounds. This may change with new EU regulation – the EU Taxonomy and the Sustainable Finance Disclosure Regulation – but the final rules are still under discussion and may not achieve widespread adoption for some time.

Jake Moeller, senior investment consultant at Square Mile, says it may not be as big a problem as people think: “While I have seen fund groups change the name of a fund without doing too much to its objectives, it’s not common practice and there are a lot of gatekeepers now that will stop that in its tracks.”

However, he says, advisers need to be vigilant and ensure that where a fund claims to do something, it is evidence based: “Our 3D Investing business looks at the composition of portfolios to look at how securities are mapped to the UN Sustainable Development Goals and to ensure there is some tangible output or evidence-based criteria – such as carbon capture or clean water generation. Increasingly, that kind of evidence is going to be much more important. Groups are becoming increasingly aware of this and producing better PRI and stewardship reports.”

Ben Constable Maxwell, head of sustainable and impact investing at M&G Investments, says that the new EU rules will improve clarity: “We will have much better parameters around what defines a sustainable or impact fund and that clarity is crucial. It’s not easy to get those lines to be perfect and there is a lot hinging on the definitions of the different types of fund, but it’s important for the regulators to give us and investors clarity.”

On financial performance, advisers also need to tread carefully in terms of how they explain it to clients. Toby Gibb, global head of investment directing at Fidelity International, says: “At Fidelity, we run a strategy focused on sustainable water and waste. The strategy will be very underweight areas such as technology and financials. When those sectors do well, the strategy will do much worse and vice versa. There has to be an understanding that sector rotation will impact relative performance quite meaningfully. If you have confidence in the theme, you need to take a long-term view and not to be buffeted by the quarterly relative returns.”

That said, the sustainability sector appears to be finally putting to rest any lingering suspicion that investors have to give up performance to do good. Moeller says: “There’s a lot of academic literature now that shows companies with higher ESG scores tend to perform better. There could be many reasons for that, but the misconception about some compromise being involved is being disproved.”

Gibb agrees: “The cost of capital for companies that have strong ESG characteristics or that operate in sectors that are deemed to be sustainable is going down. As long as that continues, then there is a tailwind from a performance perspective.”

This is a nascent industry and, as it matures, there will be some clunkiness in way performance is measured and reported. However, there are better prospects on the horizon as definitions are standardised and understanding improves.