A number of fund management companies have been stepping up ESG integration efforts. For example, BNP Paribas Asset Management and Amundi have defined clear AUM targets, while State Street Global Advisors rolled out last month its proprietary ESG scoring system.
Fidelity is the latest to join the pack, launching last week its proprietary “sustainability ratings”, which seeks to formalise the firm’s ESG integration process, according to Jenn-Hui Tan, Singapore-based head of capital markets and corporate governance.
The launch of Fidelity’s ratings comes at a time when regulators have asked asset management firms to reveal how ESG is integrated in the investment process.
In fact, more scrutiny has been placed on the whole topic of ESG, as a number of managers have been caught greenwashing.
Tan said the firm had been using ESG factors in its investment process, but it introduced a scaled ratings system in order to prove to investors that the firm actually has an ESG process.
“What we haven’t done well enough is really evidencing that ESG integration,” Tan said. “We haven’t really provided any significant data or analytical tools for our clients.”
Tan said the aim is for all internal fund managers to adopt the ratings system.
“The CIO sits down with each portfolio manager during the quarterly fund review process. He goes through the fund in detail and the sustainability ratings will be built into that review process,” he said.
Last resort: exclusion
The sustainability ratings assess companies against their peers using an A-to-E rating, with A being the highest.
However, a low rating does not equate to an automatic exclusion or divestment, Tan noted.
“It isn’t our goal to restrict the investment universe from our fund managers. Our preferred approach is that when we have a poorly-rated company, we choose to engage more with the company and try to improve their sustainability practices.”
That said, Tan acknowledged the concerns over engagement being used to greenwash products.
“[Some investors] say engagement is an excuse to continue investing the same way,” Hortense Bioy, London-based director for passive strategies and sustainable research at Morningstar, said previously. “I think engagement is a perfectly valid strategy, but the issue with it is [lack of transparency], so it is difficult for the end investors to form a view on the merits of engagement.”
Tan said that clear goals and results are the key.
“When you choose to engage, you have to identify goals at the very onset, and then you measure success by evaluating the company’s progress towards those goals.
“If we don’t see better practices, we have a range of options, including voting against the management, and then at the last resort, if we feel that a company is not being responsive or making sufficient progress, divestment.”