We Look for Managers Advancing the “ESG Ball”

BlackRock’s former head of sustainability came out with an op-ed article recently that was highly critical of the financial industry’s environmental, social, and governance (ESG) initiatives. He voiced concerns about greenwashing among asset managers and even questioned the effectiveness of ESG. Over the years we have spent researching the space, we have grappled with the same issues. We have admittedly had a love-hate relationship with ESG. At times we have been sympathetic to the comments made by the former BlackRock employee. I even recall a time when I said that if climate change is running a five-minute mile, then ESG is walking a 20-minute mile. The point I was trying to make is there seems to be a duration mismatch between the urgency of some of the problems at hand and the actual impact of the solutions in the marketplace. It also related to the disconnect we see between investor expectations and what ESG or sustainable investing can realistically deliver.

As skeptical as we have been, we fully support the initiative, and we’re not letting “perfect get in the way of good.” So, I want to be clear about our stance. At the end of the day, ESG is a label, and a label by itself is not enough for us. Seemingly on a daily basis at this point we continue to discuss ESG efforts with a lot of firms that are starting to incorporate ESG or are increasing their ESG effort, which is interesting and nice to see. But in most cases, we would not hold them out as being “enough” for us, at least not yet given where they are in their ESG integration.

Our approach is to sift through and find what we think are the best ESG options, those doing great company-level analysis and effecting positive change. To that point, if you think about the ESG space as a distribution curve, the entire curve is moving to the right. The space is evolving. We’re working on making sure we can stay as far to the right of that curve as we can, which again, is a moving target. I feel strongly that our approach of continuing to find firms that are authentic and intentional about advancing the ESG ball is where the value-add is today in the mutual fund space. To be clear, I do think a number of the funds and firms we have approved or recommend have met our demanding requirements and are making a measurable positive impact, specifically through the engagement process.

Looking ahead, we continue to think that the distinction between ESG and non-ESG is going to compress due to regulatory changes and other factors. As I mentioned, virtually every firm we talk to is incorporating ESG into the investment process. We are starting to consider whether some high-conviction funds that are not necessarily designated as sustainable or ESG by prospectus or mandate could make it into our ESG lineup and stand side by side with funds with formal ESG mandates in terms of sustainability or impact.

In terms of investment options, we are moving into high gear on a new fund that we will hopefully share shortly. And we’re also exploring ways to illustrate the differences between the ESG funds we follow, whether it’s their areas of focus or differences in approach.

One final point is that we continue to be agnostic about whether a firm is ESG or not; an ESG strategy should not be reserved for an ESG model. If we believe an ESG fund is solid based on our due diligence, it should be able to find its way into our models if the conviction is there. That’s how we’ve been thinking about it. This is not new. Perhaps eventually we could see convergence progress to the point where there is no distinction between an ESG and a non-ESG portfolio implementation. Time will tell.

—Jack Chee, Sr. Research Analyst, Litman Gregory


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