Asset managers state that climate change is a priority. However, many cannot say what the carbon intensity for their investment portfolios. Photo / File
New Zealanders may find that some investment funds are exaggerating their commitments to the environment. Otago University research has shown that regulatory intervention may be necessary to stop investors from choosing “lemons”.
Researchers
With support from MyFiduciary, Saturn Advice, and Morningstar, we surveyed 105 asset managers to determine the performance and environmental, social, and governance (ESG), strategies of global equity funds that are available to Australian and New Zealand investors.
First, they surveyed asset managers to understand how and when they incorporate ESG information in investment decisions. Next, they compared survey responses with the underlying investments.
Researchers found that fund managers made decisions to consider responsible investment factors mainly because they wanted to attract new customers or limit financial risk.
Dr. Sebastian Gehricke, a senior lecturer and deputy Director of the Climate and Energy Finance Group of University of Otago was one of the four researchers who contributed to the paper “In Holdings we Trust: Uncovering ESG Fund Lemons”. He stated that fund managers seemed motivated by creating value.
He said that investors and clients were likely looking at sustainability issues through a values perspective, which is what a very small number of funds stated was motivating them.
“There is conflict of interest in a way which is driving part of this.”
The researchers compared the survey responses with portfolio holdings data and found that carbon intensity levels were significantly higher for asset managers who were members of a climate initiative. They also found no significant differences for those who said they prioritize climate change themes or engage in a decarbonisation plan.
“The divergence in words and actions seems to be consistent with greenwashing money (‘lemons”) seeking responsible investments flows without ‘walking on the talk, the research paper states.
Gehricke stated that there were many investment managers who were based on their intentions.
“Some people say something and then don’t do it. That would be greenwashing. There are also many people who say they are doing something, but don’t know how it will work.
He stated that climate change was, on average, the most important topic among a number of environmental, governance, and social themes.
Many of them failed to report or could not provide portfolio level data on carbon intensity – a basic measure for carbon risk in an investment portfolio.
“We were surprised at the small amount of funds required to provide this metric.”
The researchers found that about half of those who provided the metric did not report their emissions intensity when they compared it with their own metrics by looking at actual portfolios.
“There was about half the reporting that was on par or slightly more, but there were many that were significantly under-reporting.”
Gehricke stated that fund managers should disclose more data.
The External Reporting Board of New Zealand is currently developing standards for climate disclosure. These standards will go into effect in 2023.
“This will give us better information and it includes fund managers of a certain size. They will need to start reporting a lot more of these things. Transparency and openness are essential. I believe regulation or some type of oversight by regulators are also very important.
“Someone like FMA [Financial Markets Authority]Potentially could, and probably will, start to investigate greenwashing in relation to these fund managers fiduciary duties.”
Gehricke said it couldn’t point out problems at specific fund managers because the data was anonymised as part its agreement with those who it was collecting data from.
He said New Zealand could also look to Europe, which had recently introduced a package of policies classifying fund managers based on the proportion of environmental-focused activity in their portfolios.
“They have to report it legally. It’s similar to what we have here, but it is much more than climate change.
He stated that Morningstar, a research and rating company, had recently downgraded 2000 funds that were previously deemed sustainable because they no longer met EU regulations.
“Transparency is the key.”
Gehricke stated that those who want to make sure that a fund does what it claims, should check with third parties such as the Mindful Money website.
“Be cautious about where you get your information. Mindful Money is a third-party that examines the holdings.
He said that investors can also ask fund managers about the portfolio’s carbon emissions intensity relative to its benchmark.
“If they really are doing something, it should be less. They should also have a good reason for why it is higher.
Gehricke stated that the researchers were currently treating the study as a pilot, but they were planning to expand it with a coauthor from MIT in America into a global study. They also plan to dig deeper into the holdings section of the analysis.