Read the labels closely
Shopping for responsible asset management
Rewind a decade or so. You’ve decided it’s time to eat better, so you head to the local grocery store looking for healthy options. After strolling down aisle after aisle, past countless shelves full of processed food, you run into the “organic” section tucked away in the back.
Fast forward to today. Step foot in a supermarket and you are bombarded with signs and labels touting natural cuisine. Organic food is the fastest growing segment of the food industry. But if ever there is a time to be suspicious of a claim, it’s when it becomes a trend—and this applies to investments touting environmental, social and governance (ESG) principles.
Global investment managers are not unlike food conglomerates—think asset classes as food types and funds as brands. If a manufacturer’s dedication to natural food only extends to some of its brands, you’d be wise to ask what’s in its non-organic food. With capital rapidly flowing into sustainable investing funds, an increasing number of managers are touting their integration of ESG criteria. To judge legitimacy, you need to take a closer look at the ingredients.
Foremost, investors should be wary of firms that include ESG considerations in only a few of their products. A siloed approach may be the symptom of superficial commitment. They might be feeling out consumer demand to see if the so-called Green Wave is itself sustainable.
Responsible investing must be a mission fully embraced by a company. It should extend across all asset classes and investment teams and be supported from the board down. If a firm believes it helps mitigate risk and builds wealth for its clients, then it should be looking to incorporate it into everything it offers.
A major indicator of how serious a firm is about ESG is its investment in human capital. Does it have subject-matter experts dedicated to engagement and stewardship? If so, what are their backgrounds and education? Portfolio managers shouldn’t go back to school for environmental science. They run funds because they know the markets, how to evaluate credit and how to read economic developments. But they need an informational advantage supplied by staff looking beyond data from third-party providers.
As more passive ESG vehicles emerge all using the same data source, the endeavor is becoming commoditized. The barrier to entry is low and many consumers lack the time or knowledge to tell one firm from another. This puts a premium on in-house expertise. Going directly to the source with a subject-matter expert can lead to proprietary insights and fundamental research. A climate change specialist is best positioned to have a collaborative dialogue with an oil and gas supermajor about reallocating power generation to sustainable energy. Backing that person up with a team devoted to high-touch engagement affords a better understanding of long-term ESG risk, not to mention being a better advocate for positive change.
Ultimately, analogies are a stretch. But it is wise to watch what you eat and how you invest.