Sustainable Investing Opinion Briefs: August 15, 2018 – August 31, 2018

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August 29, 2018 – A survey by Chas. Schwab finds that the majority (more than 75%) of retail ETF investors “would invest more in SRI strategies” if funds were offered that “reflected the issues that are more important” to them.  A similar sentiment is expressed by the survey’s respondents regarding SRI funds offered through brokerage platforms and retirement plans.  These responses suggests that retail investors have very specific and sometimes “narrow” sustainability concerns when it comes to investing.  In other words, funds with broader, more general sustainability focuses may be less attractive to retail ETF investors. We see this as a challenging problem for fund managers and distributors.  How can investment mandates be narrow enough to meet such retail investors’ desires, while still making business sense?

August 28, 2018 – Transparency of portfolio holdings is seen as an area for improvement in ESG funds according to Dominik Benedikt of Ertse Asset Management (Austria). Mr. Benedikt’s company deals largely in non-US institutional funds, which have less standardized portfolio holdings disclosure requirements than US mutual funds.  But he does make the point that information on sustainable holdings in his arena are lacking.  He also sees value in the use of government issued validation or “environmental labels”. We think that it would not only benefit investors, but if would generally add credibility and lessen confusion for funds labeling themselves as sustainable.  Equally important for investors is impact portfolio reporting. On the downside, there is a cost associating with classifying holdings in any way, but one hopes that managers claiming to be running sustainable portfolios already have the information at hand.

August 17, 2018 – Morningstar’s Daniel Kleenan and Madison Sargis ask “How Does Sustainability Affect Investor Decisions?” Their answer delves into “what sustainability information do investors pay attention to most?”  By examining flows for individual funds with their Morningstar Sustainability Ratings, the researchers concluded that investors do pay attentions to sustainability information, especially when it is unfavorable.  In these situations, investors are thought to use such information as an “exclusionary factor” when selecting funds.  In other words, “investors strongly avoid funds that are rated poorly from a sustainability perspective… “   We think that it might be helpful to also examine whether the promotional/sales campaigns and related inputs of intermediaries may also play a role in fund flows.  Remember the old adage,“funds are sold, not bought”.

August 14, 2018 – A recent report entitled “Time to rethink ESG index construction” by Anthony Renshaw of Index Solutions states that “ESG indices often have considerable tilt to other factors such as value and growth”.  This tilt may result in “unintended bets on other risk factors” can sometimes be as influential from a performance attribution standpoint as ESG factors.  Adding to the problem is that it is often difficult to construct an ESG index using generally acceptable criteria, as inter-investor expectations related to sustainability considerations may be present.  Of course the same could be said for investment style indices, but we agree that tilt and biases for these may be less subjective and somewhat easier to control.

August 14, 2018Regulators in Europe are responding to growing investor interest in ESG issues, according to delegates attending the recently held Luxembourg Opalesque Roundtable.  The response from policy-makers center around seeking more “ESG information, data and processes”, particularly disclosure and “new fund documentation” on how managers are actually implementing “ESG best practices”.  These initiatives are not limited to individual countries, but pan-EU. We believe that disclosure is a positive step, but the standardization of such information is needed to allow for clearer comparisons among managers. We also think that these regulatory efforts overseas are a precursor of things to come domestically.

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