Investments, Portfolio Construction

New index rates managers’ green credentials

responsible investment credentials

A new index will provide greater clarity around the underlying holdings of fund managers and their adherence to responsible investment measures.

An independent investment consulting firm has unveiled a new responsible investment (RI) index that assesses an investment manager’s credentials by examining portfolio metrics as well as its intentions and actions in relation to responsible investing.

Evergreen Consultants director Angela Ashton said the Evergreen Responsible Investment Grading (ERIG) Index will assign RI grades to managed funds and will provide advisers with a portfolio analysis and product search tool using RI filters.

“Given the absence of a consistent industry approach, we took on the task of developing our own index to comprehensively assess funds and portfolios on a wide range of RI themes,” Ashton said.

The ERIG Index will use the Responsible Investment Association Australasia’s (RIAA) RI spectrum as a base and provide an assessment of a fund manager’s RI capabilities by assigning a score for each of the seven capabilities within the spectrum. These are environmental, social and governance (ESG) integration, negative screening, norms-based screening, active ownership, positive screening, sustainability-themed investments and impact investing.

Ashton said the scores will be comparable with similar funds and asset class averages and each fund will be assigned a quartile ranking based on the combination of its underlying scores in each of the seven RI characteristics.

She added that while a fund manager’s RI credentials can be assessed using a bottom-up approach that relies on publicly available data, the ERIG Index will apply a top-down approach.

A bottom-up approach might give a tobacco company a high RI rating if the company has comprehensive ESG programs, but that ranking did not consider the product being manufactured or its impact on society, she pointed out.

“The top-down approach assesses how a manager has integrated ESG and RI issues within their investment processes, taking their intent and action into account,” she said.

The index has already graded over 600 fund strategies and fund managers looking to be added to the index need to answer a questionnaire that examines the high-level approach of the manager and the depth and breadth and strengths and weaknesses of the fund’s investment process.

“Fund managers do not pay to have their funds graded. Instead, if they wish to, they can subscribe to the ERIG Index website and utilise the analytics tools available via the portal and highlight the ERIG Index quartile ranking assigned to their fund,” Ashton said.

Recent research from Vanguard and Investment Trends found more than half of SMSFs would give consideration to ESG issues when investing, even if the returns were lower than other investment options.

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