What's in a name? Questions to ask to spot ESG washing

In a study comparing over 10,000 funds between 2004 and 2018, it was found that sustainable funds provided returns in line with comparable traditional funds while reducing downside risk. It is increasingly costly to ignore ESG risks, as shown in a December 2019 report highlighting that ESG controversies wiped US$500 billion off the value of US companies over the last three years.

However, we would caution against the complex nature of supply chains when applying exclusions. The key is to know where to draw the line with respect to the nature of business involvement and the companies' materiality thresholds. For example, we may exclude tobacco manufacturers from the ESG funds selected, but not exclude supermarkets and stores distributing cigarettes if the proportion of revenue from cigarettes is less than say 5 per cent of its overall revenues.

For best-in-class integration funds, we found that leaders in the space have a strong understanding of how different ESG factors affect their portfolio company and highlight that not all metrics are of equal importance. For instance, environmental factors are more important in the mining sector from a risk management perspective and not so for a bank in financial services, so weighting of these factors should differ.

Another huge consideration is active ownership/stewardship activities of the fund houses, specifically how involved they are with proxy voting and engagement with shareholders.Finally, for ESG funds marketing themselves as impact funds, we ask for quantitative and qualitative data on how they are measuring impact. Meaningful quantification of impact is not always easy, especially for public companies, since their impact may not be as direct as investments made in the private markets.

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