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ESG ratings help you zero in on the best RI funds
12/13/2018 10:57:58 PM
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The Analyst’s Desk
Informative and authoritative articles on the world of investment funds from Fundata’s Investment Analytics and Research team.

By Reid Baker  | Monday, December 04, 2017



In the world of responsible investing, there are mutual fund companies that invest according to strict Environmental, Social, and Governance (ESG) principles. In other words, the first set of screening they do eliminates the companies that do not meet their ESG standards. However, if you look into the details of the portfolio (most ESG investors will), you might find some puzzling names. You might ask yourself for example, why does this XYZ Responsible Investing fund hold banks and oil companies? And what makes this XYZ Responsible Investing fund so different from this regular ABC Canadian Equity Fund? This is where the MSCI ESG Fund Metrics come in.

The ESG ratings allow you to determine the degree to which your fund is implementing ESG principles in investment decisions. This also allows you to identify funds that don’t necessarily put ESG first but end up with a quality ESG portfolio nevertheless.

There are over 100 metrics to evaluate the ESG qualities of a portfolio, so investors can focus on areas of keen interest, all rolled up into the ESG Quality Score, which allows for comparison across all investment mandates, geographical focus, and asset breakdown. Fundata fund snapshots now shows the ESG Quality Score as well as Exposure to Leaders & Laggards, SRI Screening Criteria Exposure, and Exposure to Sustainable Impact Solutions. Here’s an example of the ESG metrics you’ll find on a Fundata Fund Snapshot.

When sorting the data by ESG Quality Score, the first thing I noticed amongst Canadian Equity funds was the lack of funds with a Responsible Investing (RI) mandate in the top 20. In fact, as shown in the table below, there are only five funds in the top 20 that invest first and foremost with an RI mandate.

Does that mean that the RI funds aren’t doing a good job of carrying out their mandate, or that the non-RI funds are actually looking to invest in companies with solid ESG profiles? It’s probably more likely that the lines between RI investing and non-RI investing are starting to blur. The top two ESG performers are funds that track the Jantzi Social Index, which is not a surprise. But look at the top holdings, and you see four of the big banks, two telecoms, an oil company, and a railway. That’s exactly what you would expect from any Canadian Equity fund. These aren’t just solar and water companies.

What’s happening here is that typical Canadian Equity funds looking to provide strong returns and minimal volatility are looking for companies with sustainable, long-term growth profiles. These are exactly the companies that ESG principles and the MSCI ratings promote. RI investing according to ESG principles has really turned into a great way to identify companies that are built to succeed for a long time.

When looking for an RI fund, this makes it all the more important to, at the very least, check the ESG Quality Score as opposed to simply relying on the fact that the fund calls itself an RI fund. Not all RI funds are created equal. Let’s take a deeper look at three of the top rated ESG funds: Meritas Jantzi Social Index Fund (RI mandate), Beutel Goodman Canadian Equity Fund (no RI mandate), and NEI Ethical Canadian Equity Fund (RI mandate).

Despite the overall ESG scores being fairly close, the Meritas fund is doing the best job at avoiding ESG laggards and companies that are flagged for SRI exclusions factors. This is likely because the Jantzi Social Index eliminates certain companies right off the top. The Beutel Goodman fund, operating without an RI mandate, doesn’t have the same exclusion criteria. But again, in the search for long-term capital appreciation and sustainable growth, it ends up holding companies that score well according to the ESG ratings. The overall quality score actually comes in higher than the NEI fund despite the fact that the NEI fund is better in the four sub-metrics shown here. However, keep in mind there are over 100 sub-metrics that go into the overall score.

Reid Baker is Director, Analytics and Data, at Fundata Canada Inc., a leading source for investment fund information, and is Chairman of the Canadian Investment Funds Standards Committee (CIFSC).

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, management fees, and expenses all may be associated with exchange-traded fund (ETF) investments. Please read the simplified prospectus before investing. ETFs are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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