An independent investment consultant has designed a responsible investment index that assesses fund managers on their ESG-related activities and found that many funds are doing ESG-related work without being categorised as such.
Evergreen Consultants works with financial advisory firms to provide bespoke investment solutions, and have implemented the Evergreen Responsible Investing Grade Index (ERIG Index). The index evaluates more than 270 funds across seven categories of activities derived from the Responsible Investment Association Australasia (RIAA), said Angela Ashton, co-founder of Evergreen Consultants.
"We look at the way that managers implement a process," Ashton said. "This is akin to a PE ratio on a portfolio. It's necessary but not sufficient to prove they have ESG.
"We look at the way that processes are embedded at fund managers and what they're doing so you can get some more consistency. It's more of a top down to see how they look at ESG through the process."
The EIRG index looks at how managers implement ESG integration, negative screening, norms-based screening, active ownership, positive screening, thematic investing and impact investing, integrating principles outlined by RIAA and the UN Principles for Responsible Investment.
The index was developed to assist clients with inquires about ESG characteristics of fund managers, Ashton said.
"Definitely some of the clients are saying we want to do ESG but we don't understand it at all," Ashton said. "There are others, particularly those who are only starting now, who feel that it's information overload. You have to work out what the terms are. It's like a thick maze - if you don't have a clear starting point, it's hard to make progress.
"What we tried to do is really try to simplify it and build it out."
The ERIG index evaluates funds on a scale of ten for each of the seven categories, and presents the category scores to clients to help them judge where fund managers are performing by those standards. The index revealed that many managers are integrating at least some of the strategies that characterise responsible investment, Ashton said.
"A lot are doing negative screening, some are only the basic ones like alcohol, armaments, etc., but a lot are doing that," she said. "Active ownership is pretty common now - most managers will vote at least at some AGMs now.
"The bits like impact and positive screening are still not well integrated, but people are surprised at the amount of activity."
Evergreen initially started with a pool of 160 funds, but quickly grew out to the current total of more than 270.
In the next stages, Evergreen Consulting will build out the granularity of its evaluation, to delve further into what sorts of negative screens managers implement, gain more clarity on positive screens, and eventually align manager activities to the Sustainable Development Goals, Ashton said.
Ashton noted that the ESG funds that they evaluate within the index don't necessarily show financial outperformance compared to non-ESG funds.
"The fund that call themselves ESG were not particularly better than those that weren't labelled ESG," she said. "This is only one tool for manager selection. We have to look at things like style and other criteria. This is one tool now in the way that we consider fund managers for clients."