Fund managers are quick to claim they invest sustainably, without giving up investment returns – but do they really live up to their word?
According to the Investment Association (IA), the trade body for the funds industry, sustainable investment funds are now about 7% of the UK funds industry, with nearly £100 billion invested in the sector. Interactive investor launched its ACE 40 list of recommended sustainable funds in 2020 to help investors pick sustainable funds.
Morningstar, the investment data group, analysed more than 100 fund groups to find out who the real leaders were in the burgeoning environmental, social and governance (ESG) investment space.
Its ESG Commitment Level ranking system is focused on the extent to which asset managers and funds incorporate ESG considerations into their investment processes, and highlights the asset managers that are leading the way when it comes to sustainable investing.
Morningstar says: “Asset managers that earn top marks under the ESG Commitment Level are those that our analysts expect to continue leading the charge on ESG and sustainability issues. Because such a large portion of a fund’s sustainability characteristics is driven by centralised resources and active ownership strategies, it is crucial to assess the firm itself, not just individual funds.”
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It gave eight asset managers the top score of “ESG leader”. They were: Affirmative Investment Management, Australian Ethical, Boston Trust Walden, Domini, Impax, Parnassus, Robeco, and Stewart Investors.
On Impax, Morningstar said sustainable investing has been at the heart of the group’s culture since its foundation in 1998, and this is reflected in its product offering that is entirely geared toward sustainable funds.
“The firm’s well thought-out, thorough approach to sustainable investing, comprehensive and experienced resources, and strong active ownership practices mean Impax retains a Morningstar ESG Commitment Level of ‘leader’,” it said.
On Stewart Investors, Morningstar said: “Stewart Investors has very strong sustainability credentials and puts ESG at its core, making it among the industry’s finest sustainability managers. While its Edinburgh arm run under the St. Andrew’s Partners banner was closed in 2022 by First Sentier Investors following a strategic review, this only serves to cement the firm’s focus on ESG, with the Sustainability Funds Group now responsible for all strategies.”
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Morningstar upgraded two firms, Wellington Management and Brown Advisory, from basic to advanced. Two firms – Franklin Templeton and BetaShares – were upgraded to “basic” from “low”. One firm – UBS Asset Management – was downgraded to “basic” from “advanced”.
BlackRock, Capital Group, JPMorgan and Invesco retained Morningstar ESG Commitment Levels of “basic”. Vanguard remained at “low”, with Morningstar saying that it had an inconsistent approach to ESG, a lack of ESG specialists and low support for shareholder votes related to ESG.
Other leading fund managers with a big UK presence were Legal & General Investment Management, Jupiter Asset Management, HSBC Global Asset Management and Axa Investment Management. They all received an “advanced” ESG investing score from Morningstar.
Terry Smith’s Fundsmith received a “low” score from Morningstar. It said: “The firm offers a sustainable mandate, but this primarily adopts a negative screen rather than actively seeking out ESG criteria. The strategy also has a small impact on the firm-wide ESG assessment given it constitutes less than 2% of assets under management.”
Bailie Gifford was ranked “basic” by Morningstar due to lack of ESG metrics disclosed on their funds and lack of integration between the ESG and investment teams.
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