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New Research: In Holdings We Trust: Uncovering the ESG Fund Lemons

Sustainable investing is largely driven by expected value, not ethical values, a new report from University of Otago’s Climate and Energy Finance Group (CEFGroup) has found.

A copy of the industry report can be found here: Australasian Fund Manager ESG Practices

A copy of the working paper could be found via the following link: In Holdings We Trust: Uncovering the ESG Fund Lemons

Stakeholder demand for socially responsible investment has led to a rise in investment funds adopting responsible investment practices, including environmental, social and governance (ESG) practices. However, despite sustainable investing sweeping the industry, it is often unclear what fund managers are actually doing to invest more sustainably.

The CEFGroup’s latest industry report – in partnership with Saturn AdviceMyFiduciary and Morningstar – surveyed asset managers of global equity funds available to Australasian investors to understand how they integrate sustainable practices within the investment decision-making process. Along with many new insights, the report found:

  • Responsible investing by fund managers is driven mainly by performance value and attracting investors, not ethical values and responsibilities.

  • Only half of the asset managers surveyed reported their portfolios’ carbon intensity, a basic measure of carbon risk in an investment portfolio, which is surprising as portfolio carbon intensity should be the easiest portfolio climate metric to provide in terms of data availability. This is particularly startling as climate change was the most important issue according to the survey.

  • Of those that did report these metrics, around half underreported and many did so by a large extent.

Saturn Advice General Manager Peter Dine says there is growing evidence that companies who embed ESG considerations into their decision-making are likely to achieve superior long-term financial performance, compared to those that don’t. This report provides insight into where the fund management industry is currently at on ESG practices and helps with questions people should ask managers about their sustainability practices, he says.

MyFiduciary Principal Chris Douglas agrees and says studies like this help to put a spotlight on how investors and fund managers are responding to growing sustainability demands. “In-depth analysis like this helps to lift the level of debate within the industry and inform investors and fund managers on good practice and the spectrum of outcomes from the leaders to the laggards,” he says.

The results are based on a Master of Finance thesis from University of Otago student Lachie McLean, which looks at managers’ actual portfolio holdings.

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