Global look at fund managers’ commitment to ESG

Morningstar has released a global report on asset managers’ commitment to ESG including many whose funds are accessible in New Zealand.

Thursday, September 21st 2023, 6:43AM

by Andrea Malcolm

More than 100 firms such as Betashares, Magellan and Dimensional Fund Advisors, as well as industry giants BlackRock, Vanguard and State Street are included in the Morningstar ESG Commitment Level, a qualitative rating of asset managers’ will to incorporate ESG factors into their investment processes and deliver sustainability outcomes.

Morningstar says the report aims to help investors with their fund and asset manager due diligence process.

Lower and slower

Of the 108 assessed, 31 asset managers including Dimensional Fund Advisors, Magellan, Hyperion, Vanguard and Van Eck rated low on their commitment to ESG.

The report says firms at this level tend to be slower to adopt ESG policies and processes, doing so only once they are common practice or regulatory requirements, or they avoid prioritising ESG considerations based on clients' and other stakeholders' preferences.

“These firms also typically have a small percentage of assets in sustainability-focused funds. As a result, incorporating ESG criteria and pushing the needle through active ownership tend to be lower priorities.” In other cases, they may be just getting started on incorporating ESG considerations into their investment processes, but a late start means their efforts lag peers.

Basic to advanced

Betashares moved from low to become one of 48 firms with a basic rating including CapitalGroup, BlackRock, ColumbiaThreadneedle, DWS, Fidelity, Invesco, Morgan Stanley Investment Management, State Street Global Advisors, T. Rowe Price, Pimco and Macquarie.

The report says these firms had made a meaningful effort to integrate sustainability themes into There were 21 firms in the advanced category including BNP Paribas and Wellington Management. Wellington moved up from basic to advanced firms in March 2023 as a result of its increased emphasis on climate, a growing central sustainable-investment team and disclosure efforts exceeding industry standards.

“The firm’s climate focus is supported by two impressive partnerships: one with MIT to research the transition to a low-carbon economy and another with the Woodwell Climate Research Center to study physical climate risk.”

The report says these firms demonstrate high competence in integrating ESG considerations throughout their fund range, even in products without specific sustainability objectives.

They have considerable track records of sustainable investing stretching a decade or more, but haven't prioritised sustainability considerations for as long as the leaders and have yet to solidify their efforts.

UBS Asset Management, on the other hand, received a downgrade from advanced to basic.

Escalation programmes

Only eight firms made it into the leaders category; US-based Parnassus, Boston Trust Walden, Domini; UK-based Stewart Investors, Affirmative Investment Management and Impax; Australian Ethical and Netherlands-based Robeco .

The report says these firms set expectations of investee companies on major ESG issues and persist through escalation to drive progress toward these goals. “For example, leading firms may engage with companies to improve climate-related reporting, net-zero transition plans, and firmwide diversity initiatives. If progress is slow, firms may escalate by voting against board directors, filing or co-filing shareholder proposals, or divesting or refusing to purchase new securities.”

The report says escalation programmes and proxy-voting strategies shouldn’t come as a surprise. “Preeminent firms pre-disclose their priorities for investee companies, promptly publish rationales for proxy-voting decisions, and provide case studies so that investors can understand the firm’s approach.”

Assessment pillars

Analysts evaluated asset managers on three key pillars: philosophy and process, resources and active ownership

Philosophy and process factors include a firm’s history of sustainable investing, alignment of its investment philosophy and ESG principles, and the level and consistency of ESG integration across the investment lineup.

Sustainable investing requires adequate resources including specialised sustainability expertise and ESG data.

To evaluate firms’ active ownership practices, analysts considered engagement and proxy-voting policies, support for ESG shareholder resolutions, and disclosure around these activities, among other factors.

Because such a large portion of a fund’s sustainability characteristics are driven by centralised resources and active ownership strategies, it is crucial to assess the firm itself, not just individual funds, says the report. For a quantitative, holdings-based measure of a fund's ESG risks, Morningstar puts out a Sustainability Rating.

Tags: ESG