Market InsightFundhouse - Investment Clarity
Industry Progress on ESG: April 2022
Published: 30th March 2022
This Article was Written by: Rory Maguire - Fundhouse
In today’s note, we look back at the many meetings that we have had with fund groups discussing ESG.
Although we review ESG as part of our overall fund research approach, we also survey managers to gain a wider industry perspective. Below we share our findings of these surveys, overlayed with the ESG work we do when assessing each fund we rate (data is 12m to end February each year).
What have we noticed?
- ESG is no longer a sideshow: We are seeing more and more managers evidencing their approach to ESG and this is reflected in the increase in number of funds we survey each year. Without exception, every fund manager we review has ESG integrated within their core investment strategies, when three years ago this was not the case. We believe ESG specific strategies, with few exceptions, may end up falling away.
- Alpha is sometimes ignored: Some fund managers are pushing ESG as the new alpha, when we believe that evidencing skill remains a nonnegotiable requirement for us, alongside ESG capability. Benchmarks remain a challenge for very green funds, but this should not absolve the managers from evidencing skill.
- ESG is improving: We have been pleasantly surprised at how far fund managers have come in improving their ESG credentials over the last three years. Our expectation is that most of the funds we rate will achieve ‘Transitioning Status’ as currently defined by the FCA policy document DP21/4.
- Regulation is coming: The FCA has released policy document DP21/4 on Sustainability Disclosure Requirements and Investment Labels (‘SDR’), dated November 2021 and they are currently collecting feedback from the industry – this will end up adding to the existing TCFD requirements in place already. Part of SDR are a set of suggested ESG fund/product labels. The EU is slightly more advanced and has already written their own version ‘Sustainable Finance Disclosure Regulation (SFDR)’ into EU law. SFDR uses articles for definition; for example, a fund may be Article 8 or Article 9 when the FCA, via SDR, prefers qualitative labels like ‘Transitioning’ or ‘Responsible and ‘Transitioning’ appears to map to Article 8 for now.
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