Beware the ESG expectations gap: Perennial

There is often an expectation gap between the ESG or sustainable funds that advisers pick and the assets that their clients want to hold, according to Perennial. 

Speaking to Money Management, Damian Cottier, portfolio manager of the Perennial Better Future fund, discussed how an adviser could select the most suitable fund for their client.

A headwind, however, is that clients sometimes don’t understand how their wishes should be reflected in portfolios.

Cottier said: “Check whether the fund publishes its holdings and look through those to determine, does it align with what your client wants? Often there is an expectation gap between what the end client wants and what the fund holds. 

VIEW ALL

View all

“A customer will go to an adviser and tell them that they want to invest sustainably, in a way that is ethical or in a way that is ‘doing good’. For a lot of the products out there, when you look at the portfolios, the clients find things that they hadn’t been expecting to be holding. That’s the expectation gap.

“Part of that is because investment managers use ESG as an analysis tool rather than thinking of what the end client is wanting.”

This is becoming more of an issue now that ASIC is cracking down on greenwashing and penalising funds which it feels portray their ESG credentials in a misleading way. 

Last month, ASIC lodged civil penalty proceedings in the Federal Court against Vanguard Investments Australia for alleged greenwashing. 

ASIC alleges Vanguard made false and misleading statements and engaged in conduct liable to mislead the public in representing that all securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund) were screened against certain ESG criteria. 

The Fund was marketed to investors seeking, amongst other things, securities with an ethically conscious screen. 

Cotter added the “rubber is hitting the road” when it comes to ESG issues after years of them being an issue that has been sidelined. 

“When I first started it was a case of these things were coming down the pipeline, whereas now we are seeing the rubber hit the road on a lot of it.

“Things like people’s carbon footprints being actively managed, managers asking questions of companies in their supply chain about their emissions and emission reductions and also countries as well as companies. 

“For example, the New Zealand government announced it will provide funding to construct an electric arc furnace which uses scrap metal and electricity to produce steel to replace the existing blast furnace which uses iron ore and coal. Using the EAF process has less greenhouse gases.”

The EAF decarbonisation project by the New Zealand government is aiming to reduce the carbon footprint of its main steel production plant, Glenbrook Steel Mill, by 800,000 tonnes.