Boutique NZ consulting firm Makao Investments has put a new twist on environmental, social and governance (ESG) research by highlighting fund manager corporate behaviour as part of the equation.
In a just-published note, Makao consultant, John Horrell, says investors should quiz fund managers about their in-house ESG habits in addition to how they implement responsible investment strategies.
“The main job of an investment manager or consultant is to produce good performance. But rather than keeping the magnifying glass solely on the investments, we suggest that you turn your attention every once in a while to the company managing or advising you on your money,” Horrell says in the paper. “We believe that providers that takes ESG seriously in running their own company are more likely to also implement better ESG considerations in their investment activities.”
He said most fund managers now claim allegiance to ESG – in one form or another – in their investment processes without necessarily applying the analysis to internal practices.
Horrell said managers could be measured on all three E,S and G attributes, covering respective metrics such as carbon footprint, gender pay and board independence.
The Makao note suggests investors query fund manager corporate ESG commitment as part of the assessment process with questions including:
- Do you offset your carbon footprint from air travel?
- Are you encouraging staff to reduce printing?
- Do you have policies for equal pay in place?
- Does your organisation support charitable work in a substantial way?
- How many independent directors do you have on your board?
- Is your bonus linked to investment performance or the profitability of the company?
Horrell said Makao, while not “perfect”, targeted higher ESG standards in its business, for example, by purchasing carbon offsets when flying or keeping printing documents to a minimum.
He said the focus on internal fund manager behaviour was a useful extra layer on top of the core Makao ESG appraisal, which ranks firms on four key aspects: criteria; insights; engagement; and, application.
The Auckland-based firm, founded in 2019 by former Russell Investments NZ head of institutional Noah Schiltknecht, had always included ESG in its fund manager rankings, Horrell said, with the process constantly evolving.
“Of course, how important ESG is in selecting managers will always depend on the investor,” he said.
However, Horrell says in the note that Makao had found “considerable differences” in ESG styles among managers the firm had researched.
“And, interestingly, we found that some fund managers without ESG directly attached to their product are doing more in practice than some that claim to be leaders in this space,” the paper says.
Horrell, also an ex Russell consultant, said Makao has built up steady flow of business with 16 clients, either as project work or ongoing advice. Last year the firm signed on Wealthpoint – the advisory network previously linked to AMP – as a consulting client.