How to spot an Authentic ESG Investment Manager?
I was recently asked this important question and it made me pause to stop and think about why authenticity is important in sustainable investing and how investors can spot an investment manager who is ‘walking the walk’ and ‘talking the talk’.
Authenticity /ɔːθɛnˈtɪsɪti/ noun
‘the quality of being real or true’
“The poems are supposed to be by Sappho, but they are actually of doubtful authenticity.”
“The authenticity of her story is beyond doubt.”
However, arguably authenticity has a greater meaning than this. In the psychology profession, it is the alignment of word and deed, with values and belief, to act in unison with your true self, which truly captures the ultimate grandeur of the word – ‘Authentic’. (Psychology today)
I will be the first to say that no one is perfect, including us, but there are definitely ways to spot an authentic, sustainability focused investment manager. Here are my top 5 indicators to truly tell whether your investment manager is authentically focused on ESG:
Engagement is a factor that truly shows how active management is important with sustainable and ESG based investing. Is your investment manager engaging with the companies it invests in to better their corporate outcomes? For example, greater diversity on boards and management, stronger reporting and audit on Modern Slavery outcomes, pushing for greater transparency in greenhouse gas (GHG) emission reporting, energy and water use, recycling and safety (just to name a few).
Is that dialogue not only outbound, but also inbound? That is, does your investment manager engage with companies it is not invested in to do the same? Are they meeting with and providing guidance to companies looking to improve their sustainability credentials even when there is no capital invested?
Having a supportive, two-way dialogue with companies to better themselves and their communities, shows authenticity, especially when no capital is involved.
Authentic ESG managers have transparency at the heart of much of what they do. This includes transparency over the manager’s company voting outcomes, full portfolio disclosure so you know what’s in there, and regular engagement reporting – not only who they met with and why, but also what the outcomes were.
Transparency enables you as an investor to ask the right questions, understand in more granularity the motivations and decision making and also the tradeoffs made by your investment manager.
Transparency also allows you to keep your investment manager accountable through measuring and monitoring outcomes.
- Corporate activities
Is your investment manager looking inwardly as well as outwardly when it comes to sustainability? Is your manager ‘walking the walk’ itself through initiatives such as offsetting its GHG footprint, voluntarily reporting to the Modern Slavery Act or Workplace Gender Equality Authority (WGEA), recycling, going paperless, incorporating water and energy ratings as part of their leasing requirements, does it have diversity targets (these are just examples and not an exhaustive list of all possible activities)? If the answer is yes – great! If the answer is no or I don’t know, then ask for more detail and question why not.
Uncovering the activities of the manager itself is a leading indicator on the true authenticity of its ESG credentials.
- Looking under the hood into their portfolios
This goes hand in glove with the transparency factor, by peeking under the hood and seeking out what the investment manager is invested in, a picture can tell a thousand words.
Revenue thresholds for portfolio inclusion is a telling one. Whilst I am the first to agree that it can be difficult to rule everything out, your investment manager should be able to pick up the phone with the companies they invest in and ask – do you gain any revenue logging old growth forests, manufacturing, distributing, or selling of tobacco or alcohol products or weapons, extracting coal, oil or gas, etc.
Having revenue thresholds allows managers to hold companies that you or I may not necessarily associate with sustainability. So, it is well worth looking at the portfolios and seeing what’s in there and asking is this authentically ESG?
- Leading and driving industry and stakeholder collaboration.
Authentic ESG managers are banding together to drive change. This include joining industry wide action groups on modern slavery, climate, and fossil fuel reduction. While some managers might join these industry groups to tick a box, managers who drive and lead change in these groups can be the ones to watch. Not all managers can lead every collaborative group but leading from the front can be a telling indication of true ESG authenticity.
Authenticity is important when it comes to understanding the true value of your investment manager’s sustainability credentials. Hopefully I have given you some food for thought when it comes to next assessing your investment mananger’s credentials.
Disclaimer: Please note that these are the views of the writer, Camilla Love MD at eInvest. This article does not take into account your investment objectives, particular needs or financial situation and is not intended to be financial advice. To find out more about eInvest, how to invest in our active ETF’s or to read the product disclosure statement, target market determination or for additional information please visit www.einvest.com.au. If you’d like to keep learning further, please feel free to follow any of our socials listed below.