Lack of transparency can misled investors on ESG
Investors who rely on pure environmental, social, and governance (ESG) product scores or labels risk being misled about the true sustainability of the product’s underlying investments, according to Lonsec.
The ratings house said funds that scored well on a pure ESG basis did not necessarily score well based on sustainability measures that considered the specific industries and activities the fund was exposed to.
Lonsec’s head of sustainable investment research, Tony Adams, said: “ESG fund managers tend to look at sustainability factors in terms of the risks they pose to a company’s business model. Academic research supports the assertion that companies that follow strong ESG standards are more likely to outperform those that do not”.
Adams said that a fund manager’s ESG analysis could create confusion for investors who looked for products that explicitly aligned with their values.
“In some cases, you can end up with a portfolio that looks very similar to the broader market when it comes to exposure to things like fossil fuels, gambling, tobacco, or deforestation. For many investors, ESG integration might sound good, but in practice it will often fail to meet their expectations,” he said.
Adams noted that ESG funds needed to be transparent about the composition of their portfolio and the size of their exposure to unsustainable industries.
“Whether it’s a company or a managed fund, what the investor really wants to know is: what industries and activities am I ultimately investing in and supporting?” he said.
“While investors care about a manager's investment process they are often more concerned about the impact their investment has on society, the planet, and future generations.”
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