The Investment Integration Project and The Money Management Institute have a new report out today on due diligence for sustainable investment products. To write the report, the authors sat down with sustainability professionals at Mercer, Cambridge Associates, Morningstar, Cornerstone Capital, Domini and JP Morgan, as well as asset management staff at Wells Fargo, Bank of America and Morgan Stanley. The group agreed that asset managers incorporating ESG factors currently fall into four groups, variously driven by financial concerns, client demand, manager self-definition, or concern for societal impact (personally, I would suggest that the latter two groups largely overlap).
For all of them, the authors suggest, it is important to ask—as it is for any conventional manager—whether the manager achieves its results intentionally, according to a coherent philosophy, through the use of effective processes, and with well-qualified staff; and it is important to know whether and how the manager monitors and reviews its own performance. In the case of sustainability, I would argue, many firms make some brief and vague statements about it, but demonstrate very little strength in these areas. The list of specific questions on page 15 of the report, if used by everyone hiring managers for an ESG mandate, would go a long way toward addressing this problem.
The report goes on to provide smart questions to ask each different type of manager. For financially-driven firms (p.16) these focus on eliciting a clear view of what is meant by materiality, and whether the firms are really building ESG into their generation of new investment ideas (rather than, for example, just getting out of coal when everyone else is, too, because natural gas is super-cheap). For client-driven firms (p.17), they center around whether the firm has ways to keep up with developments in the issue areas their clients care about, generate investment ideas from them, and discuss with the client the related possibilities of risk and reward. For manager-driven firms (also p.17), the questions center on ensuring consistency between manager statements and practices, and on means of measuring success; and for impact managers (p. 18), they center on the articulation of acceptable tradeoffs between impact and return, as well as goal-setting and progress measurement.
The paper concludes with a section on performance comparisons for ESG funds, recommending a thoughtful, multi-pronged approach. See how the fund compares both to conventional and ESG benchmarks, bearing in mind that differences in ESG strategy may affect results; and also look at the fund’s clarity of communication, as well as its record of innovation, accomplishment, and leadership in the field of ESG.
Check out the report ,and print out those questions for your next investment committee meeting.