Fund selectors need to grill fund managers about how intellectually honest their environmental, social, and governance (ESG) process is rather than rely on ratings, according to a panel.
Speaking at Expert Investor’s ESG Congress in Berlin last week, Schroders portfolio manager for the global sector, Katherine Davidson said on a panel that as there as a lack of credible third-party ratings rater and common ESG language.
“Everyone is doing something so different in this space and calling it ESG or SRI [socially responsible investing] and the underlying processes are massively different. I don’t think anyone has cracked yet how we measure those against each other,” she said.
“It’s a work in progress. I’ve been through a grilling and, personally, I prefer an assessment of process – it really pushes you.”
Ratings ‘a limited snapshot’
Also on the panel Allianz Global Investors director and senior portfolio manager for European SRI equities, Isabel Reuss, said as ratings were limited to a snapshot of the fund in one moment selectors needed to ask the right questions.
“How much of the fund has an ESG rating? Is the whole fund rated or not? You’re always going to have a certain percentage that might not be rated, because there might be new issues in bonds, but it has to be quite a high percentage,” Reuss said.
“How big is the investable in the universe? How much is being excluded out of the investable universe by the asset manager using a certain methodology and using a certain process? Either to the universe or to the benchmark? I think those are questions to be asked.”
NN Investment Partners head of responsible investment, Adrie Heinsbroek, said that selectors should not too worried about a low rating as ESG was a new industry.
“I’m looking at it from a more open perspective… funds should be built as we think they should be built, with frameworks in place, and then the rating is the rating,” he said.
“I’m sometimes surprised that fund selectors are not looking or asking us to extend them our private report on the UNPRI [United Nationals Principles of Responsible Investment] progress because that shows how companies are trying to get things done. Of course, it’s a self-assessment, but it gives you a bit of an insight.”
Heinsbroek also noted that he did not agree with the European Union on creating a sustainability taxonomy as it would kill innovation.
“It kills all innovation the way I want to build things, so please give us some freedom,” he said.
