There are certainly a lot of traditional fund managers who have very good ESG processes and a solid understanding of the risks. However, if they feel the market is compensating investors sufficiently for these risks, they’ll take them. This is because they’re thinking about ESG in terms of the future value of a firm, but they’re not necessarily thinking about the future of the planet or society.
There are funds that will be assessed strongly by Lonsec as ESG managers because they do the work, understand the risks, and engage with companies. But that doesn’t mean that their portfolios will align with what investors are looking for.
Hence the need for a new way of assessing sustainability. This new approach is crucial in order to determine what is really going on behind the ‘sustainable’ and ‘ESG’ labels. This means looking beyond the marketing stories that funds are trying to tell. Instead, we need to assess portfolios based on what investors are actually exposed to: the companies, industries, and practices that make up the fund’s portfolio.
By mapping these exposures to the SDGs and controversial industries, and distilling this into a single score, we hope to give investors the tools and information they need to make investment decisions that result in the sustainable outcomes they are looking for. We also want to present this information in a way that allows users to clearly demonstrate how their investment selection is helping them contribute to a better world.
ESG is not a redundant process, but investors need to be aware of what they are and are not getting from it. If investors understand what ESG products are trying to achieve and how they work, then they may find these products valuable. If not, then they have the information they need to find more sustainable alternatives. It all starts with education and transparency.