FINDING SOCIALLY responsible investments is easier than ever before, but questions still remain around just what impact these investments are actually having.
A responsible fund may call itself a low-carbon exchange-traded fund, but how much carbon is it actually mitigating?
“The challenge for impact investors is it can be hard to understand what’s actually going on in these responsible fund strategies,” says Amy O’Brien, head of responsible investing at Nuveen in New York City.
Socially responsible investors may be surprised at how many low-carbon ETFs hold the FANG names – Facebook (ticker: FB), Amazon (AMZN), Netflix (NFLX) and Google, now Alphabet (GOOG, GOOGL) – and other tech companies that have just bought carbon offsets to reduce their footprint, says New York-based Kellen Parker, vice president of Analytics at Flat World Partners.
Here are a few ways investors can assess whether they are making socially responsible investments.
- Learn to measure socially responsible investments.
- Mind the data gaps.
- Understand the methodology behind the rating.
- Work with a professional.
Learn to Measure Socially Responsible Investments
This was the story the team at nonprofit As You Sow uncovered when the organization started working with investors who wanted to divest fossil fuels.
“We found no one knew what they actually owned inside their mutual funds and there were a lot of false assumptions floating around,” says Andrew Behar, the Oakland-based CEO of As You Sow. “We wanted to create tools that would enable transparency and allow investors to do their due diligence efficiently.”
They created five free online tools that investors can use to screen their mutual funds against environmental, social and governance (ESG) issues. The five screening tools are for fossil-free funds, weapons-free funds, deforestation-free funds, tobacco-free funds and gender equality funds. Links to the tools can be found at As You Sow’s website.
Each tool provides ESG data on the 5,000 most commonly held U.S. mutual funds and ETFs. Investors can search by fund name or ticker symbol or browse through the entire list.
The Forum for Sustainable and Responsible Investment (US SIF) provides a similar list of all sustainable, responsible and impact funds offered by US SIF member firms. The chart lists how a fund addresses 15 ESG criteria from climate to labor relations to animal welfare. You can also find information on some funds’ proxy voting records and policies (also available in their N-PX report filed with the SEC), an issue that’s becoming increasingly important to socially responsible investors.
Responsible investors want to know how managers are using the power of their proxy votes to influence companies, O’Brien says. But this activity is not yet picked up in responsible fund ratings.
Mind the Data Gaps
While free tools are a great place to begin your research, Amanda Agati, co-chief investment strategist at PNC Financial Services Group in Philadelphia, warns there’s an element of “you get what you pay for.”
“Just because you’re scoring a portfolio doesn’t mean the underlying data is sound, or that it meets your overall goals,” she says.
With no standardized metric for measuring impact criteria, rankings are subjective at best.
ESG ratings aren’t like bond ratings, Parker says. You’d be alarmed if Fitch and Moody’s differed strongly on a company, but two of the biggest ESG ratings providers, MSCI and Sustainalytics, “can vary widely on a given name.”