When you see the term “greenwashing” in a fund management context, it usually means that a new ESG, Sustainable or Impact fund has been launched by a firm that hitherto hadn’t appeared that bothered about such matters and thus they are accused of, at best, jumping on the green bandwagon, or worse, shamelessly rebranding a fund in the hope of selling more units. Think Starbucks jumping on the banning-plastic-straws trend by replacing them with bigger plastic lids…
We have certainly seen a lot of that, and as fund selectors, historically we have been able to swipe aside these Johnny-come-Latelies and focus on those funds with a heritage of Sustainable or Impact investing, as client allocations to such strategies have been small. Fund selectors like evidence; has this portfolio manager been running money in this way for a meaningful length of time? Are the factors that have allowed them to be successful still in place, or has something changed? Are they incentivised to do the right thing by their clients or are they out to enrich themselves and their shareholders? As long as we could find one or two funds that tick these boxes, we have done our job.
The trouble is, there simply aren’t enough funds with heritage around to meet future demand. To achieve the UN’s Sustainable Development Goals (SDGs), it was estimated at the Global Impact Investing Network’s 2019 Forum that an investment of $2-3 trillion per year will be required for the next 15 years. The same group estimate that there is just $502bn invested in Impact funds currently. Even if we count Sustainable funds, which took in $20.6bn in flows during 2019 (according to Morningstar), it feels like that is a big gap to close.
Listed equity and private equity funds are being launched to meet the increasing investor demand, and close this gap. These funds often invest in the green technology companies that will potentially help solve the world’s sustainability challenges. But what if an investor wants to be impactful, but doesn’t want to lose the diversification benefits of a multi-asset portfolio or indeed take on equity risk at all? There is an increasing need for sustainable credit strategies for instance. If we can have impact private equity, why not impact private debt too? A direct lending strategy that directly finances the solutions needed for a sustainable future would be very impactful and surely very popular. In liquid markets, an Alternative Risk Premia fund that optimised for negative carbon intensity whilst still having a low beta to equity and credit markets, would be a very useful tool.
We are just starting to see such funds get launched, incubated or sketched out on a white-board, and it is the usual players in these spaces that are doing it, not niche green funds. It is like the electric car industry – sure Tesla were innovators but now Audi, Jaguar, Porsche and everyone else have joined in and made much more reliable electric cars. Is that greenwashing? In some cases, it may well be, but when your Tesla won’t boot-up it will be scant consolation that you backed the firm with heritage over the powerful new entrants.
As fund selectors, our job is always to cut through the marketing spin and get to the reality. This will be no different. Is this fund launch a shameless grab-for-cash or is the fund manager genuine about making an impact as well as returns? If there is genuine intentionality behind these investments, rigorous measurement of the impact, and if the industry can coalesce around some standardised reporting, then we will make progress regardless.
The zeal of the convert can be powerful, and the might of the largest asset management firms turning their attention to fighting climate change can be the way to close that financing gap. So we will have to throw out our demands for a certain number of years of track record, we won’t necessarily be able to model how these funds do in certain scenarios, or go through past trades or deals as evidence to the same degree that we usually like to. We will need to be braver and back funds earlier than usual.
As consultants, we need to build tools for investors to assess the trade-off between impact, risk and return. Quantifying the difference between divesting from fossil fuels in an equity portfolio and directly investing in a renewable infrastructure project for instance, as well as every asset class in between. Investors can then make informed decisions about their asset allocation, adding the third dimension of impact to the usual two: risk and return.
As the fund management industry launches new products or adjusts existing ones in a variety of asset classes, it will enable investors to make this choice, and allow the SDG financing gap to close. If that is greenwashing then so be it. Fund selectors and asset owners alike will need to keep doing what they always have, cut through the marketing spin and dig deeper, but they will also need to be brave and back new and innovative solutions, even if they might have come out of a firm with little history of investing impactfully. If we don’t then capital won’t flow quickly enough, those SDGs won’t be achieved, and the world us and our kids will be living in will be a far worse place than it could have been.
