Are "good" funds going mainstream

Are "good" funds going mainstream

Some funds want to help make the world a better place, while still turning a tidy profit. The concept seems to be slowly-but-surely catching on.

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Some funds want to help make the world a better place, while still turning a tidy profit. The concept seems to be slowly-but-surely catching on.

There are signs that so-called responsible investment (RI) funds are becoming more popular, and new dimensions are being added to this notion. Have these products become mainstream?

Most investors want to back ethically motivated companies. Institutions want to protect their reputations and individuals want a warm glow from doing the right thing to accompany a decent financial return. Moreover, the industry is convinced that young people (the investors of tomorrow) are particularly keen.

Yet as every individual has their own nuanced idea of morality, designing these products is tricky. Getting it wrong opens investors and asset managers to the potential risk of appearing hypocritical.


MORE TRANSPARENCY

Labelling is helping. Luxembourg's labelling agency Luxflag uses relatively strict criteria when classifying funds. ''Applications are assessed by independent third-party eligibility committees composed of industry experts, academicians and analysts," explained Annemarie Arens, Luxflag's general manager. Their stringent procedures mean relatively few funds qualify. A total of 45 funds with nearly $12bn assets carried a Luxflag label in April, a relatively small amount given the €35 trillion currently invested in all funds worldwide. Contrast this with the fund data company Morningstar, which has recently decided to give a sustainability ranking to around 20,000 funds.

Other moves are afoot, with the financial data firm MSCI also planning a label, the germanophone sustainable investment forum FNG introduced a label last year, and the French government is considering action too. Some industry players hope that the EU might act to bring more standardisation, others warn this might prove too complicated given how definitions of responsible business vary.

"This trend towards more labelling is a good development," Philippe Zaouati, CEO of the RI asset managers Mirova, told the recent Alfi Spring Conference panel on RI funds. "Transparency, simplicity and flexibility are central," he said, "however there arc concerns about Morningstar's methodology which could potentially create strange results."


ACTIVISM BY FUNDS

The Montreal Carbon Pledge is an example of the asset management industry seeking to be seen to doing the right thing. It asks investors to commit to measuring and publicly disclosing the carbon footprint of their portfolios on an annual basis. Launched in 2014, the organisers claim it has attracted commitment from over 120 investors with over $10 trillion assets under management.

This move will help nudge people towards greener investment choices, but there are concerns about how to measure something as literally cloudy as a carbon footprint.

"Active ownership" is a growing dimension. RI funds traditionally limit themselves to investing in assets which meet certain criteria, but activist funds are increasingly trying to reform company behaviour towards environmental, social and governance (ESG) questions. Given that institutional investors are often major company shareholders, they have substantial power." Large asset DIUMO May2016 managers in general are showing growing activism in enhancing their corporate governance policies, reporting on non-financial outcomes and using ESG screening as a risk management tool," noted Arens. Jane Wilkinson, a partner at KPMG Luxembourg, agreed: "The most activist are establishing teams and working with other investors to push certain ESG issues up the agenda."


3% OF FUND ASSETS

However you want to define it, responsible investing is a growing trend. European RI fund assets almost doubled to €372bn in the five years to 2014, said a 2015 Alfi/KPMG survey. Yet that only represented just over 3% of all fund assets in Europe. Advocates suggest these figures underestimate the change that is taking place. "Companies that have taken a passive stance to responsible investing over recent years are becoming more activist, while those who had been doing little or nothing are now carrying out basic ESG screening," argued Wilkinson.

Having strong checks on governance can alert investors to deep-seated and as yet unrevealed problems. "We had excluded Volkswagen from our 'best in class' category for equity funds," Frederic Surry, head of equities and convertibles at BNP Pruibas Investment Partners told the Alfi Conference. ''We did this because we were concerned over the high number of recaJls and governance issues at Porsche/VW, but the full scale of the scandal was not predictable," he added.


WHAT ABOUT RETURNS?

A warm glow is all well and good, but there are concerns that RI funds perform less well than traditional funds. ''We conducted a study with the University of Maastricht that found a mixed picture when it came to returns for ESG funds," noted Stan Beckers, CEO of NN Investment Partners. Zaouati suggested, however, that non-financial outcomes need considering when making an assessment "No doubt asset managers can find 50 or 60 securities with a good ESG story and good prospects for growth," he suggested. As with all investing, there are no quick routes to getting exactly the ideal ethical stance you might want, but more information should raise awareness and help guide choices.

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