How Fund Managers Check ESG Claims (and Avoid Greenwashing)
Following on from the last post, we’ve got a little more terminology on ethical investing and then how these managers are actually assessing their options.
Environmental, Social and Governance (ESG) Investing
Another important term is ESG, or Environmental, Social and Governance which is often attached to funds (e.g. this ESG ETF from Vanguard and this ESG UCITS ETF on Hargreaves Lansdown). This means that manager is prioritising assets which prioritise the ESG metrics.
The environmental part of that might feel fairly obvious - companies which safeguard the environment or actively work to protect it. The social part refers to how the companies behave in their wider community - relationships with employees, suppliers, customers and the physical places they’re based. The governance bit refers to the leadership, internal controls and how the company makes sure they reach those goals - how they take a hold on their behaviour essentially.
Best-In-Class Tilting
It isn’t always all or nothing.
One way that managers can make decisions using these concepts (screening, engagement and ESG) is to weigh the investments in favour of their objectives.
That means they might not say an absolute ‘no’ to a company trading in tobacco, alcohol or nuclear for example, but they will place more money, relatively, in a company who doesn’t invest in those things or that has won awards for their community engagement.
How Do We Know The Rules These Managers Are Following?
By reading the fund objectives and aims which are generally front and centre of the buying page. Don’t be afraid to properly read them - what one manager thinks is ethical may not be what you think is ethical and there is a whole lot of inconsistency in the market.
Last week’s newsletter was all about this, so feel free to have a poke around (and sign up for future editions here!).
I remember having a long discussion with some high up manager at a high street bank known for their ethics. I was asking about their arms policy which was vaguely described as ‘ethical’ if I remember rightly, which turned out to mean that they invested in UK arms but not foreign ones. I couldn’t understand, and still can’t really, the ethical difference between trading in UK arms firms and foreign arms firms, and the end result was I didn’t bank with them (although there was no alternative that I found who didn’t deal with arms, but at least they didn’t pretend…). I feel quite proud of 16 year old me for that actually.
Where Do Fund Managers Get Their Info From?
Companies publish data on that kind of thing - they know people are interested in it and it’s in their interests to discuss it. They could well be doing good stuff, it’s also entirely possible that they talk the talk but don’t walk the walk. In some cases there will be regulatory requirements though, like carbon efficiency (although literally as I’m writing this the European Parliament have just voted to drastically reduce sustainability reporting and due diligence requirements).
They’ll also keep an eye on news and legislation in the sectors that they deal in. For example, in the UK the Competition and Markets Authority recently took action against ASOS, BooHoo and George at ASDA about their green-washing claims which has led to formal agreements with those companies and then publishing more general industry guidelines. Events like this may affect whether a manager trusts the information given by the companies and where they think the industry is headed in general.
In reality, these guys will often have a lot of access to big business, politicians and other institutions that we could only imagine. So there’s a lot of behind-the-scenes work we never see.
And there are also independent bodies whose sole purpose is to assess and report on ESG issues - for example the Global Reporting Initiative which aims to standardise the language and tools used so comparisons can be more valid and reliable.
Under the Financial Conduct Authority stewardship and sustainability requirements, managers do have a responsibility to do their due diligence. The oversight of their work, and sustainability in the financial arena more generally, is where we’ll start the next blog. Can’t wait to see you there!
As always, feel free to ask more questions - I’ll be answering them in this week’s newsletter.
Love Eleanor. xxx
