Dozens of new funds claim to practice environmental, social and governance investments, but their managers fail to determine whether the companies they own are adhering to these standards.
And that leads to style rather than substance, two longtime ESG portfolio managers said in an interview.
“The majority of investment managers who apply ESG just pay money to data providers to tell them what is good ESG,” said Tony Tursich of the Calamos Global Sustainable Equities Fund (ticker: CGSIX).
ESG ratings are not like ratings assigned by credit rating agencies, where there is an agreement on credit criteria. With ESG, there are no standard definitions, so ESG scores on the same company by different agencies can vary widely. And there is no clarity on how they arrive at those scores.
“The methodologies that these data providers use to arrive at their ranking are a black box,” Tursich said. “At the end of the day, you can’t rely on these third-party data providers to tell you what good ESG is. And I think most investment managers who want to be ESG do it today. “
As the Securities and Exchange Commission plans to create standards and definitions for ESG, investment managers who view ESG as a tick-box exercise may soon have to change their practices.
“The legislation is starting to catch up with some of the environmentalists on the asset management side, and it will continue,” said Jim Madden, co-portfolio manager of the Calamos fund.
Pioneers of sustainable investing
Tursich and Madden are considered pioneers in the field, having seen the world of sustainable investing grow from a niche to a Wall Street darling. They developed one of the first sustainable research platforms in the 1990s and in 1999 launched Portfolio 21, which was eventually acquired by Trillium Asset Management, becoming Trillium ESG Global Equity Fund PORTX,
Under their management, this fund has beaten its MSCI ACWI Index and the Global Large Equity category, both short and long term. It has a 10-year annualized return of 12.8% versus 11.6% for the index, and it beats 84% of its peers, according to Morningstar.
The two joined Calamos earlier this year as part of the company’s push towards sustainable investing, and launched Global Sustainable Equities on December 20. They plan to manage the new fund with the same philosophy they have had over the past 30 years, integrating ESG and financials, and looking for high quality companies with above average growth potential. Managers say companies with attractive financial attributes that understand their existing and emerging ESG risks have a competitive advantage.
Values + performance
In the 1990s, sustainable investing was primarily focused on values, followed by performance. Tursich and Madden looked at ESG from an environmental risk perspective. But there was little data available that measured this type of material risk, so they gathered data from scratch, talking to companies, talking to non-governmental organizations, and combing through academic research.
Over the years, they have developed proprietary ESG analysis criteria used to rate a business, looking at data such as life cycle analysis of a product or service, recycling / reuse, ecological constraints. and management’s commitment to sustainability and awareness of future risks, etc. .
Today there are millions of data points, but understanding what’s important is essential, Madden said.
“The most important skill set these days is being able to filter all the information that’s available… and that’s where our expertise comes in,” Madden said.
Many long-term portfolio managers want quality companies, but for Tursich and Madden, quality is multidimensional. Financially, they focus on metrics like a company’s ROI and other aggravating fundamentals, but ESG is also a quality factor.
“ESG gives us a more complete picture of what a business is,” Madden said. “We want to identify non-financial risks before they hit the income statement (profit and loss). Because they will reach the P&L, they will manifest. And if you can see them before that, you save yourself a lot of pain. “
The two fund managers avoid corporate greenwashing by looking beyond marketing. Climate goals such as net zero are one of the latest marketing ploys, they argue. Net Zero 2050 is a goal to completely cancel out the amount of greenhouse gases produced by 2050. Some companies have made statements but don’t have a roadmap to achieving this goal, and it can be difficult to investors understand it.
“They’re just making the statement because investors ask them to,” Tursich said. “They want to attract investors widely and also have a good image with regard to the environment.”
To see if a company’s net zero goal is legitimate, executives analyze a company’s operations, looking at both past operations and plans for the future. This upstream and downstream review demonstrates a company’s progress in reducing its environmental footprint and environmental constraints.
Decarbonizing is not easy for businesses, and it takes time, which is why having a good business plan is essential. Madden cited shipping giant AP-Moller Maersk’s decision in 2017 to sell its oil and gas division to French oil giant Total to become a pure shipping company as an example of a company in transition. On the flip side, not all green looking companies are good value, like some solar companies, as many do not fit their traditional financial quality profile.
“These business models aren’t necessarily great,” Madden said. “You have to marry the fundamentals with the theme, if that’s the way you think it and people who aren’t used to it.”
One of Madden and Tursich’s favorite companies, Darling Ingredients DAR,
did not see itself as a sustainable business until the leaders met with the leaders of the company. The company uses animal carcasses and used cooking oil to produce feed and biodiesel, recycling products that might otherwise go to landfills and creating usable goods, which, according to Madden, ” is the ultimate ESG story “.
A rendering plant isn’t a sexy ESG story, Madden admitted. “But at the same time, they’ve got a great business model, a great idea, great execution. These are the companies that we are looking at, ”he said.