While environmental, social, and governance investing has become more popular, so has the concept of “greenwashing.” Greenwashing is when a money manager uses marketing and PR tactics to overhype their ESG efforts so they can seem more committed to socially responsible investing than they really are. After all, several asset managers purporting a commitment to ESG have been found holding shares of fossil fuel companies, weapons manufacturers, and mining firms.
Over at GreenMoney.com, Lori Keith, director of research at Parnassus Investments and portfolio manager of the Parnassus Mid Cap Fund, provides tips for how to avoid investing in products that pay only lip service to the ideals of ESG.
Read the Prospectus, Review the Holdings
Keith advises that investors considering an ESG fund should read the prospectus. A fund’s prospectus should identify whether all its holdings are evaluated using ESG metrics, or if it simply employs screens to exclude certain kinds of companies (like tobacco or gambling firms). The prospectus should also show whether an ETF merely considers ESG or fully integrates ESG criteria into its investment process when constructing the portfolio. Reviewing the holdings can also offer insights about whether the fund’s portfolio aligns with the claims made by its manager.
Investigate the Fund’s Investment Process
Keith advises that investors should learn about a fund’s ESG philosophy and investment process. Find out if its process includes ESG analysis, and if its investment team conducts its own ESG assessment, or if they rely exclusively on third-party research providers for ESG ratings on companies.
Prospective investors should also ask if the fund’s portfolio managers and analysts actively buy into the ESG process, and if they’re engaged in assessing material ESG risks and opportunities. When doing the homework on ESG funds, investors should learn what the portfolio managers seek to gain by choosing ESG-vetted investments.
Seek Out Stewardship Excellence Markers
When seeking ESG funds, ask yourself if the fund manager discloses their proxy voting decisions. If so, do these decisions align with their stated ESG values? Does the investment firm encourage positive change in portfolio companies through engagement with senior management? Is the firm a member of any independent organizations that promote ESG investing?
Consult Outside Sources
Keith notes that third-party sources like Morningstar have numerous ESG rating systems. The Morningstar Commitment Level, for example, evaluates funds’ commitments to ESG and rates them on a scale from Low to Leader. The Morningstar Sustainability Rating measures how companies held in portfolios are managing their ESG risk relative to the fund’s peer group.
“The good news is that there are many more choices for ESG investors than ever before,” writes Keith. “However, because regulatory standards don’t yet exist, it is important to do your own homework to make sure your financial investments match your values.”
For more news, information, and strategy, visit the ESG Channel.