Almost half of all funds marketed to UK consumers as “socially responsible” are average or worse than conventional funds when it comes to ethical investing, according to new ratings.
The scores, newly created by fund rating agency Morningstar, raise further questions about asset managers’ commitment to environmental, social and governmental (ESG) issues after campaign groups last month accused them of playing “games” with investors.
Morningstar said the score was based on ESG ratings given to companies held within a fund’s portfolio, and takes into account “controversies” the companies have been involved in. The funds were given one of five scores: high, above average, average, below average and low.
Socially responsible funds run by JPMorgan Asset Management, Aberdeen, Robeco, Pictet and UBS were among those with funds given a “below average” or “low” sustainability score by the fund rating agency.
Schroders, Standard Life, Jupiter, Vanguard, BNP Paribas, Old Mutual and BlackRock all had funds rated “average” — meaning they scored no better than funds that do not claim to be socially responsible.
Of 193 funds marketed as socially responsible in Morningstar’s database and available for sale in the UK, 89 were rated “average” or worse, including five funds that were rated “low” and 30 that were “below average”.
Dutch asset manager Robeco appeared to be the worst offender, with 13 “socially responsible” funds scoring “below average” and one scoring “low”.
The company disputed Morningstar’s methodology, saying it was “too static” and did not take account of the fund house’s engagement with company boards. “We take an active approach by engaging with companies with the aim to improve their sustainability performance,” said a spokesman.
Many fund groups contested Morningstar’s method of rating funds against their peers, saying that the ratings judged companies against other companies within the sector without passing judgment on whether the sector itself was “sustainable”. Hamish Chamberlayne, global equity manager at Henderson Global Investors, said this meant the rating system came up with “perverse” results.
“There’s a best in class aspect to it, so looking at oil companies compared to other oil companies,” he said. “Oil Search, an Australian company busily drilling wells in pristine Papua New Guinean rainforest, scores [well], whereas Tesla, whose very mission is to accelerate the transition to sustainable energy [does not]”.
“It doesn’t matter if they’re drilling their holes in a really responsible fashion.”
Jupiter, whose popular Jupiter Ecology fund was deemed “average”, pointed out that the fund was average among other Ecology funds — but this did not mean it was not an ethical fund.
Schroders, meanwhile, said climate change trends were “complex” and refusing to invest in “energy intensive” sectors may not be the best way to lower carbon emissions.
“These sectors need large investments to be transformed towards low carbon solutions,” said Simon Webber, manager of the company’s global climate change fund. “We won’t tackle climate change by avoiding energy intensive industries, but we might do it by transforming those energy intensive industries to new forms of production.”
Out of 193 “socially responsible” funds in Morningstar’s database were rated “average” or worse
Fund managers also hit out at what they said was a bias against funds investing in mid and small-cap stocks. Jupiter said these companies were more likely to have “limited disclosure” on ESG issues.
Amanda Young, head of responsible investing at Standard Life, also argued that funds with small and mid-cap bias were penalised. “We were slightly horrified by how we were rated, so we have looked into this,” said Ms Young.
“Morningstar doesn’t have the luxury of meeting the companies [it is rating], which active managers do,” said Ms Young. “You need to be able to trust your fund manager.”
“I’m not saying [the ratings] are wrong, just that there are flaws in the system that are very difficult to overcomes,” she said.
Fatima Khizou, manager research analyst at Morningstar, said the research house took account of small and mid-cap biases within funds to make the ratings as fair as possible.
Ms Khizou said the ratings looked at fund holdings only and could not capture fund manager engagement with companies. “It’s hard to measure, you have no idea whether the engagement [with a company’s board] is working or not”, she said.
JPMorgan Asset Management said that socially responsible investing “means different things to different investors”, and that its fund “may not suit what many clients may be looking for.”
BlackRock said: “We utilise a number of measures and don’t adhere to any individual firm’s views.”
Socially responsible investing has risen up the agenda of both investors and asset managers, driven in part by renewed governmental focus on climate change.
Last month, China and the US, the world’s two largest carbon polluters, both ratified the Paris climate change agreement in a boost to efforts to bring the UN accord into force.
Morningstar has recently released the environment, social and governance scores of a large proportion of the 200,000 funds it tracks.
Industry figures told the FT ahead of the ratings being released that the initiative was significant because of Morningstar’s influence. Many investors look at the company’s fund ratings, which look at fund performance and price when making investment decisions.