Wheb Asset Management and Impax Asset Management have been named as investors leading the charge on fund transparency as “impact washing” leaves intermediaries confused about the credentials of products claiming to be impact or ESG funds.
As product launches in the space gather pace, the Investment Association is currently consulting on environmental, social and governance (ESG) disclosure, while the World Bank recently launched operating principles for impact investors and Eurosif has long offered a transparency code for investors reaching certain disclosure standards.
EQ Investors impact specialist Louisiana Salge reckons sustainable funds tend to be more transparent than their mainstream counterparts pointing to information readily available about exposure to controversial sectors, including fossil fuels, as well as operational footprints.
But Willis Owen head of personal investing Adrian Lowcock says not all fund houses launching ESG or impact products are keeping pace. “There have already been accusations of impact-washing as there have been a plethora of launches in this space in recent years as fund groups rush to cash in on the opportunity.”
Investor forums and full portfolio holdings
Salge points to Wheb and Impax in particular as asset managers leading the field when it comes to transparency.
Wheb runs public investor forums where anyone from investment consultants to Isa investors can grill the asset manager over its fund and its holdings. Additionally, the fund governance section of its website includes links to investment advisory committee meetings, voting records and its UN PRI report card. The full portfolio holdings of the Wheb Sustainability fund are also available online, broken down by theme with a short description of the investee company.
Over at Impax, full portfolio holdings are also available on its website with a three-month lag as well as its voting record. Its environmental impact reports also disclose net carbon dioxide avoided, water provided and treated, waste recycled and renewable energy generated through the companies it holds.
Mainstream firms adopting impact and ESG funds
Lowcock says no impact funds spring to mind for their lack of transparency but that “there are so many being launched one or two will fall into that category”. ESG and impact investing was named the greatest area of opportunity for asset managers, according to a report published by Bloomberg and Simmons and Simmons which highlighted the outlook for the industry in the period up to 2025.
He reckons Legal & General Investment Management (LGIM) is at the forefront of ESG and is becoming “increasingly public and vocal” about its voting practices. This week the £1trn asset manager revealed it had voted against directors over 3,800 times in 2018 with audit and diversity the issues it had homed in on over the year.
Within the Investment Association universe, 18 ethical or sustainable funds have been launched over the last year, according to FE Analytics. The majority were launched by global asset managers, like Schroders, Fidelity International and State Street. Fulcrum Asset Management, with £3.9bn assets under management, was the only boutique manager represented while none were launched by ethical or impact-focused fund houses.
Rathbones, which launched the Global Sustainability fund last year, has higher levels of disclosure on the product, covering carbon footprinting, sustainability themes it is most exposed to and engagement on specific ESG issues.
World Bank latest to tackle ‘impact washing’
Industry initiatives are afoot to drive greater transparency within socially responsible investments (SRI), ESG and impact investing.
Most recently, the World Bank launched a set of principles aimed at creating market consensus around impact investing, backed by the likes of Axa Investment Managers, Amundi, UBS and BNP Paribas Asset Management. At its launch last week, at its spring meeting with the International Monetary Fund held in Washington DC, the World Bank stated the rise of product launches claiming to be impact investments was confusing for investors.
The Investment Association is currently reviewing reporting frameworks used by asset managers to disclose how they embed ESG considerations into their investment process and the impact that their investments have had on wider sustainability indicators. The results will be published in its wider consultation on sustainability and responsible investment to be published later in 2019.
Retail SRI specialist Julia Dreblow, founder of SRI Services and Fund Ecomarket, points out many sustainable fund houses are already signed up to the European Transparency Initiative, which requires disclosure of holdings. Although one reason the code is not more widely supported is because asset managers are concerned about exposing full portfolio holdings for potential rivals to see, says Dreblow, who is a Transparency Taskforce ambassador.
In the UK, Edentree Investment Management has its full range signed up to the code, while Wheb has its single strategy included. Individual funds at Hermes, Schroders and Janus Henderson are also signatories.
However, the Eurosif website implies only a fraction of signatories are UK funds. Of the 1,138 green, social and ethical funds domiciled in Europe in 2016, 700 were signed up to the code. Nearly half of those were French, where signing up to the code is obligatory for funds marketing themselves as SRI products.
The Global Impact Investing Network’s definition of impact investing requires funds to disclose non-financial value added. Salge says that sets the approach apart from traditional investing and some other sustainable approaches. Salge says the Wheb impact calculator for its Sustainability fund is helpful in this regard.
The ethical wealth manager has previously told Portfolio Adviser it prefers impact investing over other sustainable approaches because there is less grey area about what type of companies the funds it invests in might hold.
Retail investors demand transparency
But it is also investors themselves driving transparency.
Impax has noticed an increase over the last few years of large UK wealth managers stepping up due diligence of its funds from an impact or ESG perspective, says managing director for business development Meg Brown. “They’re designing products in this area so they’re looking for more standardised information,” Brown says.
She adds: “If we get a standard questionnaire from a wealth manager today it’s a lot more sophisticated than what they were asking three years ago. More of them are asking and they’re asking better questions. At Impax, we often have calls with managers who are devising their questionnaires before they do a search and we help them think of difficult questions and share the questions we get from the consultants and the pensions market.”
Intermediaries used to ask Impax about whether it was signed to the UNPRI and its ESG policy, but now ask what score it received from the UNPRI, about how ESG analysis is conducted and by who, she says.
Whitechurch Securities head of SRI portfolios Amanda Tovey says clients in the wealth manager’s ethical products tend to show interest in the underlying holdings. “They can have questions surrounding these ranging from stock specific questions as to why a manager is holding a stock or more general questions around the overall positive impact a fund has,” Tovey says.
And EQ Investors reckons more investors would start to align their investments with their values if the funds industry was more transparent.
“In our experience, once a client gains visibility to the underlying holdings of their investments, and especially the positive and negative impacts of these companies, they are more likely to invest in line with their values,” Salge says.
