Zenith creates ESG framework for fund classification

Zenith Investment Partners is aiming to demystify ESG and responsible investing strategies for clients by introducing a tiered framework that describes funds' activities based on their research.

"When considering the landscape of ESG issues or values, there are dozens if not hundreds of issues that underpin those pillars of ESG,"  said Dugald Higgins, head of real assets and listed strategies, Zenith said. "There are thousands of ESG indices in the market, a myriad of factor that relate across climate, sustainability, governance, ethics. From an investor's perspective, the question is then how do they find an investment that represents their values, and that's where it gets tricky because everybody's values are different. Then you're going to have to define responsible investing, or sustainable investing or whatever label you want to call it."

Adding a further level of complexity is the fact that there is not one common definition of ESG, Higgins noted. Zenith approached the classification from the perspective of defining the strategies and practises to incorporate ESG factors in investment decisions and active ownership, Higgins said.

"The very fast moving pool of data in ESG," he said. "That is potentially problematic because when you see these systems, all of them will assume a common set of ESG values, but the reality is that what's responsible investing to one investor is not the same for another."

Zenith's responsible investment framework establishes five tiers. All funds with a current Zenith investment grade rating receive a responsible investment classification, noting that classifications are fund-specific.

The five tiers are: traditional, which seeks to achieve a stated investment outcome "with little to no regard for RI/ESG"; aware, which seeks to achieve a stated outcome "taking into consideration a broad range of factors including RI/ESG"; integrated, which seeks to achieve a stated investment outcome, "expressly taking into consideration RI/ESG factors which materially alter the Fund's permitted universe and portfolio allocations"'  thematic, which seek to achieve an investment outcome that "includes an explicit RI/ESG objective - both measurable and reportable"; and impact, which targets investments aimed at generating a positive, measurable social and environmental impact alongside a financial return.

By classifying manager activity, Zenith aims to achieve a common base for advisers to evaluate the responsible investment and ESG activities of fund managers.

"We looked at all this bubbling around and sat back and thought, what do we need to give our clients," Higgins said. "While it would have been tempting and perhaps gratifying to issue ESG ratings, we looked at all these issues and decided it's not probably the place we want to start. It might be an aspirational goal to get there, but we need a foundation to start from first, and we need to give our clients guidance on how to look at these issues."

By focusing on activities, Zenith can provide information that is "comparable and meaningful" across asset classes and encompassing fund managers that operate in different jurisdictions, he explained.

Zenith intends to evaluate more than 800 funds by the middle of 2021, Higgins said.

The classification system is based on proprietary information that synthesises data from a number of sources.

"We do utilise data from PRI, for example," Higgins said. "We also utilise information from the mangers themselves, and interrogate managers when we come to determining the categories in which they fall, but we have to be cognisant of the limitations of the data. PRI is the classic example. It's a useful tool, but it's assigned at a manager level, not a fund level."

Read more: ESGZenith Investment PartnersDugald Higgins
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