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The awkward tension of running ESG strategies at traditional fund firms

A fundamental conflict remains because the long-term aims of sustainable investing and the short-term goals of more traditional fund strategies

The awkward tension of running ESG strategies at traditional fund firms

In many fund houses, just down the corridor from where a new sustainable fund is being run, you will find another team running a traditional strategy. This might invest in industries that usually find themselves screened-out of ethical funds, such as tobacco, arms and oil.

Optimists might say running a sustainability fund at all is a step in the right direction. Others might call it cynical, or even hypocritical, to be riding both horses.

Ethical investment firms such as London-based Tribe Impact Capital promise clients investment opportunities that make a positive impact. So to that end they undertake thorough due diligence on fund managers.

Founder and partner, Amy Clarke, says doing due diligence on the fund house as well as products roots out groups that see sustainable investing as a fad rather than, as she sees it, the investment paradigm the world urgently needs. ‘If the product is only a very, very small percentage of a much larger pot of money, that is arguably undoing all the work its one sustainable product could be aiming to create,’ she says.

Incompatible aims

The time horizon on investments is where ESG strategies differ from many funds. Historically fund managers have come under great pressure to perform against quarterly targets. By contrast sustainable funds, by their nature, have to consider and account for their own long-term non-financial impact.

Asset manager WHEB manages a single long-only global equities strategy and invests exclusively in companies providing solutions to sustainability challenges. Managing partner and chief investment officer, George Latham, joined WHEB after running the sustainable and responsible investment funds at Henderson Global Investors for four years.

Latham questions how practical it is to add a layer of ESG (environmental, social and governance) strategy over a traditional fund and call it sustainable, because it will lead to a mismatch of time horizons.

‘So much of the fund management community runs investment strategies on a short-term basis,’ he says. ‘ESG and sustainability are much longer-term issues so it’s difficult to see the benefits of incorporating them when fund managers have such a short time horizon.’

Aligning cultures is also a real challenge to fund houses running both sustainable and traditional strategies under one roof, Latham says.

BlackRock told New Model Adviser® it has worked to make sure everyone in its investment team is on board. Amelia Tan, director of BlackRock Sustainable Investing, describes winning over the cynics.

When asked if BlackRock takes sustainability seriously while it has funds with top holdings in Royal Dutch Shell and British American Tobacco, Tan says BlackRock needs to consider investors across the globe who may not be ready to switch to sustainable.

‘In the long run sustainability will be the future of investing. At some point in time [the strategies] will blend into one. But you need to think globally,’ she says. ‘European investors may be more dedicated to sustainability objectives, but this is not necessarily echoed across the world.

‘It is our responsibility to have both options available for different types of investors.’

Awkward questions

Latham says some groups might exaggerate the distinction of a fund labelled sustainable as a separate asset class, to stand out from the crowd. Like Clarke, he is also wary that the strategies are something of a bolt-on to the wider group, rather than being core to the business.

Hermes runs two very similar-looking global equity strategies: one ESG and one not.

Andrew Parry, head of sustainable investing at Hermes, says the former was developed by specific request six years ago and remains Hermes’ only ESG fund. But the group is aware of the awkward questions that come from labelling some funds as sustainable and leaving the investor to conclude others are unsustainable.

‘Our chief executive [Saker Nusseibeh] does not want anything labelled ESG. Ideally we want all our portfolios to be considered ESG-integrated.’

He highlights some Hermes’ funds that, although not labelled ESG, are used by investors because they meet that criteria.

Hermes, like BlackRock, sees the future as sustainable but struggles with messaging. Some see ESG as best in class and some see it as exclusionary, says Parry. He notes this is linked to the socially responsible investing funds of 15-to-20 years ago, which did not have enough positive inclusion and disappointed many because they underperformed.

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