Fund Solutions

Only One Manager ‘Walking the ESG Walk’? That’s Affirmative

Asset managers’ commitment to ESG integration ranked by Morningstar.

Morningstar’s latest assessment of asset managers’ commitment to ESG integration awarded only one firm – Australia’s Affirmative Investment Management – its top ranking ‘leader’ category.

The research, analytics and data provider’s recently launched qualitative framework, or ESG Commitment Level, is designed to reflect the extent of asset managers’ willingness and ability to incorporate ESG factors into their investment processes and into the culture of their organisations.

Five firms – Amundi, BNP Paribas Asset Management, HSBC Global Asset Management, Jupiter, and LGIM – were ranked as advanced by Morningstar, while 12 were assessed as only having a low commitment to ESG integration. A total of 31 firms were assessed, across 251 funds and 140 strategies.

The assessments were based on Morningstar analysts’ perception of the performance and practices of managers across three pillars: philosophy and process, resources, and active ownership.

The sample for the assessment is representative of the full universe of funds covered by Morningstar analysts, the firm said, rather than being weighted toward ESG-focused funds.

Only 42 of the 140 strategies analysed are tagged as sustainable, including 26 passive funds. The remainder are conventional strategies which may incorporate ESG considerations, but do not target specific outcomes. An earlier sample, which identified six out of 40 managers as leaders, included a majority of funds tagged as sustainable by Morningstar.

According to Morningstar, Leader status is only granted to funds which “fully integrate” ESG factors into security analysis and portfolio construction, delivering favourable ESG outcomes at the portfolio level. The investment teams running such funds must be well resourced, have access to multiple data sources, maintain disciplined reporting processes and “incorporate purposeful proxy voting and corporate engagement”.

The only strategy to be assessed as a leader across all areas was US$1.18 billion AUM Affirmative Investment Management’s Affirmative Global Bond Fund, launched in 2018, which actively invests in green, social and sustainable bonds.

“The verification process is one of positive selection to identify and screen both issues and issuers for meaningful and measurable impact. Only bonds that fulfil the stringent criteria and whose proceeds fund projects that help the world mitigate or adapt to climate change are investable,” commented Morningstar.

Assessing Affirmative as a leader in ESG Commitment, Morningstar said ESG Investing was core to the firm’s “identity”, with ESG considerations “ingrained and pervasive” across the firm’s investment processes, strategies and operations.

Formed in 2014, Affirmative uses its proprietary Spectrum framework to incorporate a sustainability assessment into bond evaluations. Morningstar’s assessment notes the integration of the Melbourne-headquartered boutique’s seven-strong dedicated sustainability team with its credit and portfolio management teams, as well as its use of an internally developed impact database, which supports sustainability and credit analysis, based on both internal and third-party inputs.

In terms of active ownership, Morningstar noted the collaborative nature of Affirmative’s engagement activities, noting its willingness to work with “global sustainability experts to support collective action”.

According to the Affirmative Global Bond Fund’s 2019 Impact Report, the fund is the product of an exclusive partnership between Affirmative and Colonial First State. The US$31 billion fund is largely weighted toward green bonds (83% in 2019), with the rest of the portfolio containing sustainability, social and unlabelled green bonds.

The report said the fund had invested in 90 different bond frameworks in 2019, facilitating investments in more than 1,300 eligible projects across almost 150 countries.

Morningstar also issued its ESG Risk Rating Assessment for companies, aimed at helping investors to easily compare and contextualise the overall ESG risk for companies across industries.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2021 ESG Investor Ltd. Company No. 12893343

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