I recently attended the Fund Forum in Berlin. For the first time, there was a focused ESG track at the conference and I was a speaker on a panel debate. A common plea from attendees was the need for a ‘standardised’ approach to ESG across the industry. The desire for this stems from an understandable and genuine worry that fund managers might ‘green wash’ funds (i.e. saying they’re sustainable when they’re not) to raise assets under management. Unfortunately, it appears ESG rating agencies are becoming the default ‘standardising’ solution used by fund buyers to assess how ‘green’ a fund is. We believe this has negative unintended consequences.
ESG screens ≠ Sustainability
ESG screens are normally deployed at the beginning of a process and exclude stocks (if you’re a fund manager) or funds (if you’re a fund buyer) which look bad on this basis. In our view, this is a poor answer to the wrong question (i.e. ‘standardisation’ is a flawed ambition and ESG scores do not equal sustainability). I’m not saying ESG screening tools are worthless; we use them during our bottom-up process to highlight stock specific ESG risks that require further analysis. But our reason for analysing or indeed investing in a stock is never singularly determined by a rating agencies ESG score. There are many reasons for this including, but not limited to, materiality (one size does not fit all), no consideration of product impact, market cap and regional bias, incomplete data and that screens are an inherently backward looking solution. As such many of the companies we invest in have poor or no ESG rating agency scores.
I appreciate that it would be easier if all fund managers defined sustainability exactly the same way, but fund managers have never done things exactly the same way and if they did, their respective alpha would disappear. Fund managers all have different investment processes and track records which must be assessed and analysed. It is the same with sustainability and the key – as with any fund manager assessment – is not whether the approach is ‘standardised’, but whether it has integrity. There will always be charlatans taking advantage of the latest trend and this is the inevitable downside of the current popularity of Sustainability.
We don’t believe in magic green buttons. We believe the best solution – as with sustainable stock picking – is qualitative bottom up analysis.
Examples of inconsistent ESG scoring vs. Kames Capital view following a bottom up sustainability analysis.
(100 = best)
(1 = best)
|British American Tobacco||UK||Consumer||A||70||Nordic||1||Excluded|
|Airbus||Europe||Industrials||BBB||77||Nordic & SEB||3||Excluded|
About the author
Craig Bonthron is an investment manager in the Equities team, responsible for co-managing global equities portfolios. He joined us in 2014 from SWIP, where he was investment director in global equities. In addition Craig also had analysis responsibilities for the tech, energy and utility sectors. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors, a member of the global environmental equity team. Craig has a 1st Class honours degree in Building Surveying, an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 16 years’ industry experience*.
*As at 28 February 2018.