Correction: in the original version of this article Geode was mistakenly included in our data. We have now updated the article to remove the company
It’s becoming increasingly hard to tell whether companies are governance-washing.
As Terry Smith pointed out in his annual letter to shareholders by having a dig at Unilever, "virtue signalling" is becoming a widespread issue. As an example, how many corporate rainbow logos can you spot on Twitter during Pride?
We see this across the financial sector too. Famously, greenwashing is when an asset manager is accused of intentionally exaggerating or misrepresenting sustainability characteristics in their products and thus misleading investors. Not only can it be a massive governance issue, but also a legal one – just ask DWS in the wake of the police raid on its office in May last year.
For investors looking for investments with sustainable, green, or socially aware credentials, there are plenty of alternatives, but how can you tell whether the company offering the investment choices live up to these standards too? Information in this field can often be lacking.
This is a question we’re aiming to provide some clarity on using Morningstar data. Our analysts look at the ESG Commitment Levels for both strategies and asset managers, which reveals how a company holds up under a magnifying glass – especially if they are famed for their ESG products.
The asset managers are rated on a four-tier scale running from best to worst: leader, advanced, basic and low. Note that this is purely an analysis of their ESG Commitment Level and does not assess the future performance prospects. It is based on our analysts’ evaluation of a firm’s ESG philosophy and process, resources, and active ownership (more on the methodology can be found here).
I can reveal that only one fund group with UK-domiciled funds has a "leader" rating, and that’s Stewart Investors.
Best Morningstar ESG Commitment Level Asset Manager
According to our analysts, the firm has a clearly defined philosophy centred on stewardship. Its team members adhere to a code of conduct, which they call the "Hippocratic Oath", which governs their conduct and upholds Stewart’s principles. Meanwhile, on the investment side they also hold “high bars for portfolio inclusion and are clear with their investment rationale and company engagement, linking to specific sustainable development goals and outcomes”, according to Morningstar's analysis. Stewart Investors relies largely on proprietary research and acts as an active shareholder.
Our analysts do however believe that Stewart has some room to improve on reporting, as it has detailed reports at the group rather than fund level. “Still, Stewart has consistently demonstrated an unwavering commitment to ESG issues and boasts one of the industry’s strongest sustainability philosophies.”
Although not quite making it into the leader category, five fund houses an ESG Commitment Level rating of advanced: Schroder, Royal London, Legal & General, Jupiter and HSBC.
Lowest Morningstar ESG Commitment Level Asset Manager
Five rated asset managers are found in the category “low”. We have Vanguard, Man Fund Management, Janus Henderson, Fundsmith and Artemis Fund Managers.
A low rating does not mean that the company doesn’t have any ESG credentials at all. For example, all of the companies mentioned are signatories of the UN's Principles for Responsible Investment (PRI). But according to Morningstar’s methodology, asset managers with a low level “either do not integrate ESG factors into their investment processes or do so in a very limited way”.
Man Group is active in the proxy voting space too, although it is in the early stages of developing and extending practices across the entire business. In Vanguard’s case, the US company uses “negative” screens, but in practice they do not differentiate funds from their broader universes as much as peers with explicit ESG criteria.
This is also Fundsmith’s approach to its sustainable mandate. Morningstar’s manager research analysts say the group “prefers not to take a vocal stance so is not considered an ESG advocate” and has a long way to go on the wider perspectives.
“A greater commitment to ESG would include emphasis on the environmental and social aspects of ESG and governance issues extended.”
Top Sustainable Funds and their Managers
Finally, let’s have a look at how this data holds up when we look at the top funds for sustainability according to Morningstar’s Sustainability Rating. Do any of the managers of these vehicles live up to the sustainability of their funds?
