ESG assets represent more than $40 trillion globally and expect to rise to $50 trillion by 2025, according to Bloomberg. While that number is increasing, some ESG fund tags are being removed for reasons the fund is not addressing.
Aside from stripping the ESG tag due to “light or ambiguous language,” regulators are examining not only the companies represented in the fund but the fund itself in two specific areas: social and governance factors. Morningstar’s ESG classification system recently identified that roughly one in five funds had been stripped due to a lack of policy guidance, greenwashing concerns, and not delivering on what and who they claim to benefit.
ESG funds have due diligence requirements beyond just adhering to what can be statistically measured or screened. As fiduciaries, they must act in the best interest of their beneficiaries. In this fiduciary role, social and corporate governance issues can impact the performance of their entire portfolio:
SOCIAL Consideration of people and relationships
- Customer satisfaction
- Data protection and privacy
- Gender and diversity
- Employee engagement
- Community relations
- Human rights
- Labor standards
GOVERNANCE Standards for running a company
- Board composition
- Audit committee structure
- Bribery and corruption
- Executive compensation
- Lobbying
- Political contributions
- Whistleblower schemes
The Six Principles of Responsible Investing (PRI) lays the groundwork for possible actions for incorporating ESG issues into investment practice to ensure each fund company’s fiduciary responsibilities. However, funds that fail to comply with PRI within their organization erode the public’s trust in their fund and tarnish the ESG movement.
“According to research last year, investors who signed onto the United Nations principles did not improve the social and environmental performance of their investments. According to the researchers, signatories “use the PRI status to attract capital without making notable changes to ESG.”
When companies offer insincere commitments or overpromise transformation, they risk undermining the real work being done by others.” – An ESG Reckoning is Coming, Harvard Business Review.
Often, ESG funds are asked by institutional LPs how they comply with ESG and the Six Principles for Responsible Investing. Working with an industry-specific PEO, such as Aspen HR, helps ensure that ESG funds comply with social and governance factors and the Principles for Responsible Investing and maintain their ESG tag by practicing what they preach.