By Alan Porter, Fund Manager, Sanlam Investments
It has been reported that Morningstar, after an extensive review, culled more than 1,200 funds with combined assets of $1.4 trillion from its European sustainable fund list. This cull represents around 40% of the assets under management that Morningstar had considered sustainable at the end of September 2021. Our response? Too right!
Most of the funds rejected were classified as Article 8 funds under the Sustainable Finance Disclosure Regulation (SFDR). SFDR sets out the mandatory ESG disclosure obligations for asset managers and aims to bring in a level playing field for financial market participants and provide transparency in relation to sustainability risks. As managers of the Sanlam Sustainable Global Dividend Fund - an Article 8 fund- we know how important the external validation of sustainability credentials is.
We are surprised at how many funds have managed to be classified as Article 8 funds. Any action by research and data providers to raise the hurdle and help ensure greenwashing is eradicated should be applauded.
For us, several things are key to help ensure credibility in sustainable investing. In addition to negative screening, where certain subsectors are excluded, sustainability analysis must be embedded in the research process for choosing which companies to invest in. A clear test of this is that you can demonstrate that companies that fail your sustainability analysis will not be invested in. In the same way that you wouldn’t invest in companies that you felt had weak business models or were expensive. We employ a sustainability scorecard as the first part of any company analysis. If a company scores negatively we will not proceed.
Engagement with companies is also an important part of sustainable investing. We have written on the importance of voting (see Why voting matters) as it allows for scrutiny of a board’s actions. We vote on all items and proposals on behalf of our clients. When we vote against management proposals, we let the company know why we have voted the way we have. This naturally leads, in most cases, to engagement and we can then further assess the responses we are given.
We believe external validation of sustainability credentials by the likes of Morningstar and MSCI is key as is having targets for portfolios related to such bodies. We target an MSCI ESG rating of AA or AAA, the top two ratings, for our fund, always.
A combination of negative screening, integration, engagement, and external accreditation is a powerful proof that greenwashing in not at play. We believe there will be further action by research providers, and hopefully regulatory authorities, to ensure a level playing field and transparency in the field of sustainable investing.
Fund risks
The Fund has holdings which are denominated in currencies other than sterling and may be affected by movements in exchange rates. Consequently the value of an investment may rise or fall in line with the exchange rates.