The increasing number of ‘secret’ ESG funds

The multi-manager team at BMO Global Asset Management has found that 95% of their underlying active managers consider ESG criteria – despite not being classed as responsible investments

The multi-manager team at BMO Global Asset Management has found that 95% of their underlying active managers consider ESG criteria – despite not being classed as responsible investments – while 40% had ruled out stocks purely on ESG factors.

Scott Spencer, investment manager within the team, said they decided to look at all the open-ended active funds featured in the multi-manager portfolios to see if they consider ESG factors in their stock selection process and were “pleasantly surprised by the results.”

Out of the 65 underlying active managers they surveyed, over 95% said they looked at ESG criteria when stock picking.

Furthermore, 63% said they had increased their focus on ESG over the last few years with almost 60% of the fund managers asked having a separate ESG team at their firm.

In addition, they found around 40% of the underlying managers will rule out stocks purely on ESG factors.

Spencer said: “Focusing on these factors is what any good steward of capital (be it in a portfolio manager or company management) should do. Any business that over the longer term exploits their customers, stakeholders or environment will eventually be found out and punished.”

He added they had only three active manager that did not consider ESG factors, which were an EMD bond manager, a UK index linked bond manager and a macro focused absolute return manager that uses indices, not direct stocks.

As ESG investing continues to grow and the product set widens, Spencer also said funds that have a strong negative view on certain sectors, like the more traditional ‘ethical’ funds, will have a limited universe.

“However, if you want funds that are aware of the importance of environmental, social issues and good governance then your potential universe is probably wider than you thought and is growing,” he added.

ESG scoring

Spencer also highlighted investors need to be aware of the wide variety the investment community is seeing in ESG scoring, and the need to be aware of the what the methodology you are currently uses places higher emphasis – or value – on.

 “ESG scores can vary on who is doing the scoring. Even independent ESG rating agencies apply different techniques and methodologies to ESG never mind individual companies. If you look at two of the biggest ESG rating agencies, MSCI, FTSE and use their output you can come up with different answers based off different opinions of what matters and levels of transparency.”

He pointed to the “well-known example” of electric car manufacturer Tesla; MSCI ranks the business top of ESG within the global automobile sector, while the FTSE puts it as the worst carmaker globally on ESG issues. This is due to MSCI giving Tesla a strong score for the environment, as it focuses on the emissions produced by its products, while FTSE gives it a very low score on the environment as it focuses on the emissions produced by Tesla factories. FTSE also gives the company low scores based off lack of data, while MSCI assume an average score if it has no data on certain metrics.

“Blindly following ESG scores without knowing and understanding what you are following can lead you to very different results,” Spencer said.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...