Most global equity funds marketed to NZ investors as eco-friendly are more green-wash than true-to-label, according to a new report.
In fact, the analysis that squeezed environmental, social and governance (ESG) data out of 44 international share funds sold in the Australasian market, concludes those aligned with formal global climate movements tended to have a higher-than-average exposure to carbon.
“We found that portfolio carbon intensity was significantly higher for respondents that were members of a climate initiative, and not significantly different for those that prioritised climate change themes or engaged in a decarbonisation strategy,” the report says.
“This finding does not appear to be driven by actively engaging or activist funds, rather, it is consistent with greenwashing funds seeking to attract responsible investment flows. This is concerning for retail investors, who may not be able to distinguish between greenwashing funds (‘lemons’) and genuine responsible funds.”
Produced by the Otago wing of global research collective, the Climate and Energy Finance Group (CEF) – in collaboration with researchers Morningstar and MyFiduciary, and the Saturn Advice business – the study compared survey data from 44 providers against real portfolio holdings.
More than half of the 105 firms identified as offering global share funds in the NZ and Australian market declined to respond to the survey, however, the researchers had access to portfolio data for 78 funds in total.
But as well as suggesting carbon greenwashing is the norm rather than exception, the report found some significant differences in ESG strategies based on manager location and fund size.
Most managers also failed to report underlying portfolio carbon exposure to an expected high standard, according to Sebastian Gehricke, CEF deputy director and co-author.
Gehricke is also a senior lecturer at the Otago University business school, which houses the CEF team.
“Any fund managers concerned about climate change, which was the most important ESG topic for respondents on average, or that claim to integrate ESG (83.7% of respondents) or employ screening (81.4%), should have access to the emissions data for most of their holdings,” he said. “This is particularly the case for the surveyed funds, as they are all global equity funds and therefore have decent emissions coverage. If they have the data, calculating their portfolio emission intensity is very simple and we even provided a formula and explanation of how to do this. So in short, the funds in our sample would not require to invest money to measure their portfolio emission intensity.”
The majority of managers in the survey appear to adopt an ESG stance either for the prospect of higher returns or to meet client demand rather than citing “an ethical responsibility to make a positive difference”, the report says.
Gehricke said ESG manager motivations should have an impact on investor choices and policy-maker decisions.
“If an investor or policy designer wants a fund to be more ESG orientated for their values (better actual environmental and social outcomes) based motivations, but their manager is motivated by value, this can create agency problems,” he said.
“For example, I believe managers with purely commercial motivations have more of an incentive to overstate their ESG outcomes to retain/attract investors and may be more focussed on the impact of ESG risks/opportunities on performance rather than the impact of the investment on the environment and society.
Furthermore, the report backs up previous findings showing wide variance among third-party ESG data-suppliers.
The research found “ESG named funds only obtain significantly better portfolio ESG scores, relative to non-ESG named funds, using ratings from MSCI and Sustainalytics, but not Refinitiv”.
“We contributed to the discussion surrounding the divergence of external ESG ratings, highlighting that some of the inconsistencies found in our results are likely attributable to the different scope, measurement, and weighting methodologies of the providers…,” the study says.
Chris Douglas, MyFiduciary principal, said the paper shows the local investment industry has some way to go in developing a cohesive approach to ESG investing and reporting.
However, Douglas said the NZ market would benefit from further joint studies between academia and industry.
“At the very least it stimulates valuable debate,” he said.