How ESG are the ESG fund providers?

How ESG are the ESG fund providers?

One could argue that good ESG starts at home, and not just with a product range. As demand and awareness around environmental, social and governance factors grow, ETF providers are under increasing pressure to showcase their own good practices.

Fund houses will also have to become more transparent on ESG, whether they like it or not. By 2020, the European Commission will require investment houses to disclose how they integrate ESG opportunities and risks into their processes to stop funds being labelled as ESG when they normally wouldn’t qualify – otherwise called ‘greenwashing’.

When it comes to analysing ESG practices at investment firms to pick an ESG fund, a similar analogy might be choosing a charity to donate to. Sure, that charity might do great work, but how do they treat their own staff? Are they paid fairly? Or if you’re looking for a new job, does the company adhere to the law and pay tax? Does it allow flexible working?

An organisation’s corporate culture and relationship with its workforce is a strong signal of how it carries out its business and therefore how successful it will be in the long term. And with investment houses, to be truly ESG-oriented, those principles cannot only apply to its outward-facing product range.

EBI’s ESG-focused ‘Earth’ portfolios contain funds from two providers at the moment – iShares and GSI, with GSI having a systematic factor-based investment strategy. While the choice of ESG ETF product mostly comes down to what is available, it’s also worth considering how the ETF provider is engaging with ESG on a wider level.

iShares has made interesting moves recently, including introducing ESG scores across all of its ETFs, providing information such as the fund’s carbon footprint. This new scoring highlights how investors are increasingly viewing their potential picks through an ESG lens.

Furthermore, iShares is building up its in-house stewardship team, which analyses its investments according to certain criteria, carries out corporate engagement and votes on company issues at AGMs. BlackRock CEO Larry Fink said in a letter last year that he intended to double the size of its investment stewardship team by 2021 – the company currently has more than 40 people globally.

Larry Fink also laid out his expectations of how CEOs and board members should lead their businesses, including gender diversity at board level and making a positive contribution to society, rather than just making a short-term return. He also wrote that BlackRock would increase its direct engagement with companies rather than relying on proxy voting. (Proxy voting is, according to this Morningstar report, a common practice in fund management, where the firm employs a third party to vote at thousands of AGMs on its behalf in according to certain guidelines.)

That doesn’t mean BlackRock, or any other ETF provider, is perfect in terms of ESG-related decisions. To a certain degree, ESG is subjective, and so are the decisions by the firms in this field. But BlackRock manages almost $7 trillion worldwide, and with power comes responsibility.

For example, when MSCI consulted on whether it should still include stocks in its indexes which did not include voting rights – which would allow disproportionate power to company executives and other insiders – BlackRock wrote an open letter to MSCI, urging it to include these stocks and arguing that indexers should not get ahead of regulators when it comes to setting corporate governance standards.

The ETF provider also has a lot of work to do to gets its own gender equality in order, as BlackRock Asset Management Investor Services Ltd reported in 2017/18 a median bonus gender gap of 72% and a median gender pay gap of 55% in the lower quartile of its workforce, according to the government’s pay portal. In 2018/19 the same division was not required to report its figures.

As mentioned, limited product choice in ETF land means the process of elimination can only go so far. Certain factors will always be prioritised when choosing suitable funds, such as annual fee, performance and liquidity. But increasingly, how fund providers operate closer to home is not just a ‘nice to have’ but a ‘must have’, and makes good financial sense for investors to take into account.