Square Mile Investment Consulting and Research has launched an environmental, social and governance “integration assessment” for funds. The firm says it has been introduced to “meet market demand” and will rate funds between zero and three – from no approach to ESG to it playing an integral role of a company or fund’s process.
The approach will be used on all investment companies and funds in Square Mile’s Academy of Funds of roughly 350 funds.
Square Mile’s director of research and consulting Victoria Hasler says: “Feedback has mainly come from advisers and the end clients who are expressing an interest in investing in this way. We want to help make sense of the terminology and help advisers make sense of [ESG]. As analysts, we have seen a lot more interest from groups who want to talk about what they’re doing.”
Square Mile’s ESG Integration assessments are applied at two levels. Firstly, it will assess at a company level how a business integrates its ESG considerations across its investment processes, referencing specialised ESG resources, any formal policies incorporating ESG factors across its business, and the monitoring of ESG within processes, engagement and voting practices.
Then it will do an assessment at a fund level of how ESG is adopted – if at all – by fund managers, analysing the extent to which ESG is used as an input in the process, which factors are considered, how these factors impact research and portfolio construction and how, if relevant, the use of ESG is reflected in fund reporting.
Hasler adds: “Our ESG integration assessment aims to look across all funds and companies that we rate. We recognise that there is a significant and growing interest in the extent to which ESG factors inform philosophy both at a company and fund level. This is often used to great advantage both to enhance returns and, perhaps even more importantly, to understand and manage risk.
“In assigning an ESG integration assessment to all funds within our Academy of Funds, and to the businesses that offer them, we believe that advisers and their clients will be better placed to make an informed decision on whether their investment partner is equipped to deliver returns in a way that reflects their broader ESG expectations.
“For clients, they come in to see advisers and want to invest in an ethical way. But to each client, it’s different. We are here not to be judgemental, but to help find the right solutions for them.”
Additionally, Square Mile will be awarding responsible ratings to both active and passive funds which it believes adopts a responsible investment approach to portfolio construction and which its team of analysts are confident can deliver on their outcomes and objectives. Square Mile says the ratings “complement” the ESG integration assessment, and at the time of launch, 18 funds qualify for the responsible rating.
Square Mile commercial director Steve Kenny adds: “[The responsible rating and integration assessment] are complementary but distinct. It is clearly a growing demand from the end client and through their intermediaries to get a better sense of what it all means. One of the problems is that we use phrases such as ESG, ethical, impact or sustainable investing as interchangeable language. They have distinct meanings and the risk is if we don’t provide some clarity, people will be receiving misinformation. We are keen to take the first step of clarity into the market.”
The launch comes as Invesco has released results from its Global Sovereign Asset Management Study which shows nearly two-thirds (60 per cent) of sovereign wealth funds now incorporate a top-down ESG policy – up from 46 per cent in 2017. Its survey of individual sovereign investors and central bank reserve managers shows that ESG is also an increasingly a preoccupation of central banks, with 20 per cent now incorporating a policy, up from 11 per cent in 2017.
Invesco’s head of EMEA institutional distribution sales Alex Millar says: “The fact that over half of all sovereign managers now incorporate official ESG policies reflects advancements in investors’ understanding of how to derive value from their application. As the adoption of such policies in the construction of portfolios continues to develop, we expect to see application spread across asset classes.
“While there are many contributing factors to this rise [of ESG use], it is a clear and heartening signal that governments and investors are beginning to take environmental concerns – and particularly climate change – very seriously. Sovereigns’ and central banks’ commitment to investing responsibly is clearly deepening. As an industry, we should be working hard to support institutions in their desire to incorporate ESG by offering enough investment products to meet the demand.”