Alexander True, Business Partner at Sarasin, offers seven questions to help investors sort the green from the greenwashed.
Investors’ desire to make a positive difference has driven huge inflows into strategies that make sustainability claims. However, mounting evidence that a number of ‘sustainable’ strategies were not as green as they seemed has galvanised regulators to act.
The European Union’s Sustainable Finance Disclosure Regulation (SFDR) was introduced in 2019 to impose tougher disclosure requirements, with the aim of giving investors greater insight into the sustainability-related impact of their investments.
Asset managers complying with SFDR are repositioning their products as “promoting environmental or social characteristics” in order to meet the requirements of SFDR Articles 8 and 9 and retain their sustainability badges. However, given that SFDR permits a high degree of flexibility in defining what “promoting” sustainability means, there is still potential for misunderstanding.
Rather than trusting to high-level descriptions of investment approaches, investors should be prepared to dig deeper. With this in mind, we have put together a shortlist of seven questions to help investors sort the green from the greenwashed.
Is your asset manager a signatory to the UN Principles for Responsible Investment (PRI)?
Being a PRI signatory involves an extensive application and assessment process and ongoing commitment to PRI reporting. Signatory status is not a given, and asset managers that fail to uphold PRI standards may lose signatory status after a two-year watch period.
The minimum requirements for PRI signatory status are: having a responsible investment policy that sets out an overall ESG approach or guidelines; providing evidence that the policy covers more than 50% of assets under management; and evidence of senior management oversight and staff implementation of responsible investment.
Has your asset manager published a UK Stewardship Code statement?
Wealth creation at society’s expense is likely to be ephemeral, but responsible companies tend to create durable economic value for investors and society alike. If your asset manager is a signatory to the UK Stewardship Code, then this insight is more likely to be central to their investment approach.
The UK Stewardship Code sets high stewardship standards for asset managers. It defines stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, the environment and society. Signatories publish an annual statement showing the extent to which they have implemented the Code’s principles.
Does your asset manager actively engage with company management teams, and report on the impact of these engagements?
Investors have important rights, but they also have responsibilities to promote sustainable business practices and hold management responsible through thoughtful voting and engagement with companies. Active engagement with company management has a pivotal role to play in improving sustainable business practices. For it to be truly effective, asset managers should be prepared to dedicate resources to ongoing engagements that may take years to play out.
Policy outreach is another important way in which investors can drive change. Where there is scope for a ripple effect, investors can – and in our view should – make public calls for change and build coalitions with like-minded stakeholders through initiatives such as the Net Zero Asset Managers’ Commitment (NZAM).
Does your asset manager use voting actively to encourage improvement in corporate behaviour?
Shareholders’ votes are a powerful tool that can be used to change corporate behaviour for the better. We believe that asset managers should vote actively against harmful corporate practices rather than simply abstaining on difficult issues, or blindly voting in support of company management.
For example, we vote against company directors where we see inadequate action to align strategies and operations with a 1.5°C cap on global temperature rises. We are also one of only two asset managers that vote against auditors who fail to call out unsustainable company accounts, thereby facilitating continued investment into harmful carbon-intensive activities.
Does your asset manager publish its voting record regularly?
Sunlight is a great disinfectant. When asset managers publish their voting records it promotes progress and corporate accountability by publicly acknowledging best practice and placing the spotlight on poor performers.
It also ensures that clients can see whether their asset manager is acting in a way that aligns with their stated corporate governance and investment policies. Regular publication of votes (at least semi-annually), without cherry-picking, provides a record of continuity and progress.
Does your asset manager integrate ESG into idea generation, fundamental analysis and company valuations?
Having an overall approach or guidelines for ESG is one thing, but integrating ESG into an investment process in a way that goes beyond simply excluding controversial companies requires much more detailed work.
ESG should be fully integrated into investment processes: from idea generation in long-term thematic trends such as climate change and automation, to stock selection that incorporates bottom-up ESG and climate impact analysis and in portfolio construction, where engagement plans are decided.
Can your asset manager provide examples where ESG factors led to buy or sell decisions?
Buy and sell decisions based on ESG considerations are an encouraging sign that sustainability really has been integrated into an investment process, and is not being applied as an afterthought.
Fifteen out of 34 stocks that failed our selection process in 2018-20, did so due to ESG issues. In the same period, we removed nine companies from our holdings as a result of ESG downgrades.
Holding managers to account
A growing number of investors want their money to be put to good use or, at the very least, to cause minimal harm in generating an investment return. Regulators are increasingly holding asset managers to account on their claims of sustainability, but investors can take some simple steps to verify whether they are genuinely using sustainable investment approaches.
Look first at the company they keep – in particular whether they have been accepted as signatories to PRI and the UK Stewardship Code. Secondly, can they provide clients with a clear and detailed explanation of how they integrate ESG into their everyday investment activities?
Last, but by no means least, is an asset manager providing purely financial outcomes, or is it working to create positive change? Voting, engagement and policy initiatives are three very powerful levers that asset managers can choose to ignore or use actively to protect people and planet.