The growing demand for ESG-screened investments has had a trickle-down
effect as retail advisors, asset managers, and institutional players have
all started dedicating more resources to the ESG space in order to meet
client demand. Pension funds too are turning to ESG analysis for the
long-term sustainability implications that come with strong management in
the environmental, social, and governance areas. The effects are also
noticeable among mutual funds, with a positive upward trend in the ESG
Quality Score since April 2017.
The ESG Quality Score (0-10) is an aggregation of the ESG ratings in the
underlying holdings of a fund. Larry Lawrence, Executive Director, ESG
Products at MSCI says, “by providing the ESG scores and metrics for more
than 30,000 mutual funds and ETFs, ESG Research offers the critical
look-through tools to evaluate and analyze a fund’s underlying holdings and
make more informed ESG investment decisions.”
Looking at these ESG scores allows investors and advisors to see what the
fund managers are doing from an ESG perspective, regardless of whether or
not the fund is managed with an ESG mandate. Using these scores can also
shed some light on the ESG outlook for the fund universe as a whole.
The average ESG Quality Score has risen across equity funds in each of the
past 15 months with an average monthly increase of 0.45%. The increase in
average ESG Quality Score from August 2017 to August 2018 was 5.5%. The
graph below shows the monthly average ESG Quality Score across equity funds
in Fundata’s database.
This overall increase in the scores begs the question, Is it the mutual
fund managers shifting their focus and analysis to include ESG factors, or
is it the publicly-traded companies themselves behaving more responsibly?
Without access to the scores of the individual equities, I looked at the
holdings from some of the funds that have had the biggest increase in ESG
Quality Score. I started by screening out only the funds with an ESG score
of 5 or higher in order to focus on the funds that have an established ESG
base to begin with.
The fund with the biggest increase was
Scotia Private Canadian Mid Cap Pool, which saw its ESG Quality Score rise 26% over the past year, to 5.94.
Table 1 is a look at how the top 10 holdings have changed for the fund from
August 2017 to June 2018 (the most recent available holdings):
The biggest addition to the top 10 is Cott Corporation, which provides
“water and coffee services.” The company states, “Our brands are committed
to a sustainable future. We take advantage of environmentally friendly
processes that support the health of the planet. We are also committed to
giving back to the communities we serve. Our successful sustainability
programs have saved money, reduced landfill waste, and overall fuel
A second fund with a significant increase in ESG Quality Score is
Ninepoint Focused U.S. Dividend Class. The score rose 24% over the past year, to 5.42, facilitated by the
addition of Thermo Fisher Scientific Inc. That company’s stated mission is
“to enable our customers to make the world healthier, cleaner and safer.”
Table 2 shows the fund’s holdings changes over the period.
These are simply two examples of funds that have allocated significant
capital to quality companies and by no means provides insight on how
managers are viewing ESG in general. But it does show two funds, and there
are many other examples, that don’t have an ESG investing mandate that have
significantly increased the ESG quality of their portfolio with some key
Reid Baker, CERA, ASA,
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
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