Majority of fund firms lack commitment to ESG

Morningstar research reveals 28 out of 40 asset managers are falling short on investing ethically. 

The majority of fund firms are lacking commitment to investing in a socially responsible fashion, according to Morningstar, with 28 out of 40 asset managers falling short.

The findings come from research firm Morningstar, which has developed a new quantitative measure called the Morningstar ESG Commitment Level. It assesses how determined asset managers are to incorporate ESG factors (applying environmental, social and governance criteria) into their investment process and business, and categorises firms and their strategies as Leader, Advanced, Basic or Low. 

The aim is to help investors avoid “greenwashing” and sort the wheat from the chaff as more and more sustainably badged funds enter the marketplace. Greenwashing is when asset managers push themselves or their funds as “green” through marketing, rather than fully integrating ESG and sustainability into their investment processes. 

“It has become harder for investors to separate funds and asset managers that truly focus on sustainable investing from those that incorporate ESG factors but in a limited way,” said a Morningstar spokesman.  

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Its first round of evaluations using its new tool Morningstar looked at 145 funds (representing 107 individual strategies) and 40 asset managers worldwide. Some 77 of the funds that Morningstar analysed were labelled sustainable investment funds, while the rest were chosen to give a diverse range of strategies investing in different asset classes. 

Of the 40 fund firms, 28 were ranked as either Basic or Low, while six were labelled Leader and six Advanced. Of the 107 strategies, 23 were Low, 28 were Basic, 37 were Advanced and 19 were classified as Leader. 

Among those fund houses scoring Low were Fidelity and Vanguard, while BlackRock, Pimco and UBS were classed as Basic. 

Morningstar defined Leader funds as those which “integrate ESG factors fully into their security analysis and portfolio construction and deliver desirable ESG outcomes at the portfolio level, such as lower carbon emissions relative to a market benchmark”. To do this, well-resourced and specialised investment teams use data and rigorous analysis, and fund managers also use proxy voting and corporate engagement to push companies towards more sustainable practices. 

Morningstar ranked 11 passive funds as Advanced, 13 as Basic and seven as Low, while active funds generally fared better, the report said. 

Best-in-class funds for ESG

Examples of some of the funds Morningstar highlighted as best-in-class for ESG included Impax Environmental Markets (LSE:IEM), Pacific Assets (LSE:PAC), and seven funds from sustainably focused investment house Stewart Investors. Among the Advanced funds were four in Royal London’s “Sustainable” product suite, as well as two thematic energy and water funds from Robeco. 

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At the bottom of the pile in the Low category were four Fidelity funds, a number of passive funds from iShares’ “Core” range, and five Pimco bond funds. Three BlackRock funds featured among the Basic-rated portfolios, along with ESG-screened ETFs from iShares and Vanguard.

Morningstar defined funds categorised as Basic as those that encompass the broadest range of ESG practices, including those just using simple exclusionary screens, and also funds that are not explicitly ESG-focused, but demonstrate some degree of ESG incorporation. 

For funds labelled Low, “ESG plays only a minor role, if any, in the execution of the strategy”, Morningstar explains. “Some are just beginning to incorporate ESG information into their processes. Another group of funds populating the Low level are index funds and ETFs that track a benchmark without any ESG screening, even if the asset manager is engaging and voting to improve the holdings’ ESG credentials.” 

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