In a recent InvestorDaily podcast, Russell Investments senior portfolio manager James Harwood said with governance becoming a more important part of the ESG mix when it came to predicting performance, credible ESG managers needed to have an active engagement policy in place with company management.
“Recent scandals at AMP and Rio Tinto were initially governance issues and they’ve both been lobbied hard by asset owners since both these scandals,” Mr Harwood said.
“The Rio scandal was then an environmental and social scandal for the local community and Aboriginal owners of the land, so we’ve seen major fallout as a result of that at the board level for Rio and the company appears to be governed in a much more environmentally friendly way now.
“Advisers need to understand how their managers assess governance and the policies they have around this.
“Asset owners like ourselves are engaging increasingly with companies to influence their behaviour and we’re voting on all these issues at annual proxy meetings, so that’s an important part of an investment company’s policies, making sure they are engaging regularly with companies.”
In a recent opinion piece for InvestorDaily sister brand ifa, Mr Harwood also noted that there had been an influx of demand for ESG-style products in the retail investment market, causing many fund managers to rebrand existing products as ESG.
When assessing ESG fund managers for their credibility, advisers should take a look at their in-house research and scoring capability to ensure managers were factoring ethical considerations into their overarching strategy, including where parts of the portfolio management process were outsourced.
“We use a mix of quantitative and qualitative measures to integrate ESG in our portfolios. For the quantitative we have our proprietary material ESG score that we use in the portfolio construction process,” Mr Harwood said.
“More broadly we have a multi-manager research team that researches ESG credentials, that’s an important screening process to ensure the managers we include are doing quite well on their ESG characteristics.”
Advisers should also ensure their clients’ values matched up with the ESG strategy they were offering, as different funds offered positive and negative screens that focused variously on environmental and social factors.
“If advisers really do want that ESG specific fund, there are funds out there that focus on both positive tilts, but also have a lot of commonly accepted ESG screens to take out companies that are exposed to fossil fuels or alcohol or gambling,” Mr Harwood said.
“So it might be for some advisers and their clients that a dedicated ESG fund is the solution.”
