Why ESG Funds Fail to Scale

You’ve seen the headlines about the growth in environmental, social, and governance funds.

许多投资专业人员可能会阅读这些，并认为启动新的ESG投资公司或ESG产品将是一种自动成功。我们对数据的分析表明，这远非如此：大多数这些努力都失败了。

There are good reasons for that. So what can we learn from those that fail and those that succeed?

增长司机

There is a good explanation for why we’ve seen an increase in the supply of ESG funds: demand.

We identify four key forces driving that demand. First, data availability on ESG topics has grown substantially富人在过去几年中，数据质量也在提高。这使得资产所有者和监管机构要求经理ESG相关的问题。它还使更多管理者能够在规模上分析ESG考虑对投资组合的性能和特征的影响。

Second, accumulating evidence that ESG issues arefinancially material有权管理人员将ESG集成定位为严格的投资流程的一部分，并反驳过去的误解，即ESG就在价值观的基础上。

Third, societal pressures have led asset managers to want to better understand how companies behave before including them in their portfolios, to ensure alignment with normative principles (e.g., human rights). Managers have increasingly been scrutinized for holdings that made headlines for the wrong reasons, generating reputational nightmares.

Last, investors have realized that they can utilize the power of capital to alter unsustainable corporate behavior and help solve the world’s most agonizing problems, like climate change.

All of these developments have attracted managers’ attention in recent years. As a result, the number of investment managers that have signed on to the United Nations’ Principles for Responsible Investment reached 2,245 as of September 20, with about 66 percent of them having joined in just the past five years (Figure 1). These managers may be running socially responsible investment funds (largely based on exclusions of certain industries and/or revenue-generating activities) or impact funds (specifically targeting ESG outcomes). Other funds might integrate ESG analysis alongside traditional financial analysis, to enhance returns and/orreduce其投资组合公司的监管和声誉相关风险。

Snapshot of the ESG Fund Landscape

随着更多管理人员签署了PRI，市场变得充斥着ESG投资解决方案。截至2018年全球可持续投资联盟报道that about $30.7 trillion was allocated to sustainable investing assets. This figure has more than doubled from roughly $13.3 trillion in 2012.

The growth in the number of ESG funds has been equally impressive. Using Refinitiv’s database for funds under the Ethical category (defined as those whose investment criteria include ethical and social concerns; Refinitiv does not currently classify funds under an ESG category per se), we find that there are currently 6,618 publicly available investment products incorporating ESG-related topics in one form or another. Their total size is roughly $2.6 trillion. Of these funds, 54 percent are allocating capital in the public equity asset class, representing about 53 percent of the total size.

The pace at which ESG funds have been launched over the past several years is striking. The oldest fund in the database is Amundi’s Pioneer Fund, which launched in 1928. It was followed by Robeco’s Sustainable Global Stars Equity Fund in 1938 and UBS’s Switzerland Sustainable Fund in 1949. The real boom in ESG funds started in 2012, with more than 40 percent of all ESG funds launched over just the past five years (Figure 2). Of the funds available, about 60 percent are domiciled in Europe, and about 40 percent have a global geographical focus for their investments. Managers have responded unequivocally to client demand with new products.

We often seeheadlines陈述世界上最富有的1％是世界上有44％的财富。在ESG基金之间分配资产的分配是相同的动态。我们的数据示例表明，57％的基金在管理下的资产不到1亿美元。大约73％的人数小于2.5亿美元。只有0.9％的资金有超过50亿美元。所有资产类别都适用于所有资产类（图3）。此外，样本占总资金的1％的资金累积了大约26％的资产，前10％占分配给ESG基金的总资本的70％。批判性地，按大小的资金底部四分位数占管理层下资产的0.3％（图4）。

This is a highly fragmented market, where most of the managers are struggling to get the attention of allocators and grow the size of their offerings to sustainable levels.

Drivers of Fragmentation

我们相信这种动态背后的原因attributed to a few inherent characteristics of the investment market:

1.缺乏一个足够长的live track record:Institutional investors and distribution partners often have policies in place that prohibit them from investing in funds with live track records of less than three, or in some cases five, years. The rationale is that a sufficiently long track record helps investors get more comfortable with the performance of the strategy, as well as the manager’s ability to handle fund operations. With most ESG funds having been launched just recently, they would not qualify for investment. Unfortunately, there is nothing that can be done to speed up time. However, given that under every performance figure ever reported there is a disclaimer that “past performance is no guarantee of future results,” investors may wish to apply critical judgment and focus more on a manager’s investment philosophy and approach to achieving the desired objectives.

2.小​​尺寸：This is a controversial argument, but it is one hundred percent factual. Effectively, the reason many fundsremainsmall is that they are目前小。亚博赞助欧冠机构投资者和分销合作伙伴通常要求资金最低规模。通常，1亿美元或2.5亿美元是魔法号码，但需求可能高达10亿美元。推理是，通过政策，可能无法允许投资者持有超过一定百分比的总资金（通常是季度或第三个）。与此同时，机构投资者的典型拨款是50亚博赞助欧冠00万美元至1亿美元。这是因为任何较小的分配都不会重大影响投资组合的简档，以证明船上新基金的努力。因此，在允许分配者投资基金之前，基金需要大约2亿美元。同样，分销合作伙伴不热衷于运行基金未能增长到经济可持续规模的风险，因此必须清算。最后，大小为投资者提供了舒适和保证，该基金已被其他投资者审查和批准，这些投资者在经理和战略上进行了广泛的尽职调查。正如经常说的那样，复制和遵循而不是领先更容易和更安全。 This, unfortunately, is a chicken-and-egg problem. Too many managers have opportunities that are dependent on another, which in turn is dependent on the former. And because one is waiting for the other, at the end no investment takes place.

3. Newcomers:A lot of the management firms specializing in ESG investing have been launched relatively recently. As is true in every industry, competing with the well-known, established companies is a real challenge. This is even truer in the financial industry, where the risk to an allocator of losing his job because he invested in a manager that no one had heard of before is high. Brand does matter. In the financial industry a trusted brand provides reassurances that are critical in the allocation decision process. An established asset manager does not have to try too hard to justify why and how he can attract the best of human capital to work on a new strategy. It is assumed that big budgets have been allocated to acquire the best and most complete data, and that the strategy has been scrutinized by experienced professionals from the moment the idea was conceived. For younger firms the journey is much more difficult. Before they even get the opportunity to dive into a strategy, they need to explain their own financial positions and elaborate on the unique aspects they bring onboard versus the established players. At the end, allocators have a fiduciary duty to their investors and need to account for all types of risk associated with investing in a new firm. Surely, some sophisticated investors are running emerging manager programs to support new firms with great ideas. But the vast majority of institutional investors and distributors tend to prefer investing with established names to minimize “emerging” risks.

4. Performance:Implementation of ESG strategies may vary widely among managers. In some cases, managers may incorporate ESG considerations into company valuations or portfolio optimizations, whereas others may just be reaching for the low-hanging fruits of “ESG compliance.” In an attempt to be eligible for ESG allocations and not miss out on the trend, many managers launched funds in a hurry, without really researching what ESG investing truly is. Institutional investors have a fiduciary duty, first and foremost, to safeguard the financial interests of their beneficiaries. They are empowered, though, with the tools (i.e., capital allocation decisions) to support the integrity and stability of the whole financial system, reward responsible corporate behavior, and have an impact on global issues. Funds that deliver on their ESG promises without compromising their financial potential will be the ones with the higher chances to be successful.

建议书

The primary aim for a small fund is to reach the critical size milestones of $100 million and $250 million as soon as possible. Those thresholds unlock a lot of opportunities that otherwise are just not feasible. We believe that by following the five suggestions below, managers can maximize their chances of addressing the aforementioned obstacles:

1.Be authentic in your ESG approach:To differentiate yourself in this fast-growing competitive market, your approach to ESG investing should be genuine and not a simple box-ticking exercise. Top executives, portfolio managers, ESG specialists, and client representatives need to understand (a) why ESG is important for your firm as a market actor, (b) how it is affecting portfolio performance, and (c) why it is relevant to your clients. ESG strategies often are put together by taking the “original” portfolio constructed by the investment team and then excluding poor performers as suggested by the ESG team. To use an analogy, this is like a vegetarian ordering a beef burger and then just removing the patty; it certainly will not taste as good as a properly prepared vegetarian meal. Similarly, sustainability behavior is guided by the culture of a company and the way it operates at the cellular level — a notion calledcorporate philotimy。这反过来定义了策略，可以通过ESG度量来量化。因此，投资与ESG团队之间的断开是不合理的。投资专业人员需要了解ESG和财务绩效之间的动态，并谈论ESG投资，而不是单独的主题，而是作为企业融资2.0。这种真实的方法将解决性能障碍。与此同时，为经验丰富的专业人士提供成功的个人轨道记录投资策略的设计责任将进一步减轻基金的跟踪记录问题。

2.让叙述权：每一个策略都有一个投资目标。may be to maximize absolute performance or risk-adjusted performance, minimize volatility and/or drawdowns, or maximize ESG outcomes. Managers and client-facing personnel need to be crystal clear on a strategy’s priorities and how they can be achieved. Crucially, when it comes to sophisticated institutional investors and financial advisers, managers need to explain what void a strategy is filling. One of the major challenges for allocators is that when they are presented with an ESG strategy, they are unclear on the “bucket” in which they can allocate to it. Typically, allocations are based on factor exposures like core, value, growth, and momentum; asset classes; geographical exposures; and combinations of those. Conveying a well-articulated message — for example, “This is a European midcap public equity strategy that targets value risk premia while holding companies whose operations do not contribute to global temperatures rising above 2 degrees Celsius” — immediately helps an investor to understand where the strategy fits in his portfolio. Critically, you will need to demonstrate that targeting ESG objectives does not negatively affect financial performance. By positioning your strategy in a manner that addresses a client’s specific needs, you distinguish your offering from others’ and use the “newcomer” obstacle to your advantage.

3.教育您的客户：企业可持续性和ESG投资的领域相对较新。然而，在很短的时间内，他们已经设法吸引了来自学者和市场参与者的大量关注。对ESG主题的学术研究越来越快。与此同时，持续发布了符合ESG相关主题的目的的各种举措。监管永远不断发展，针对公司和投资者行为。如果这不是他或她的核心工作，那么有人能够跟上努力，这是很多。在这里，您作为ESG经理的位置，有机会区分您的整体服务，并使客户的生活更容易，同时将自己定位为专家。通过简明扼要地概述与ESG问题相关的新的材料开发，您可以帮助客户端导航此信息过载。对于他们可能对ESG可能拥有的任何问题，您将成为访问者。产生自己的思想领导件并同样重要。 It is your chance to articulate what differentiates you from peers and the research capabilities you bring to the table. By doing so, you again use the “newcomer” obstacle to your advantage and mitigate track record–related concerns by establishing yourself as an expert in the field.

4. Share impact reports:鉴于ESG考虑因素是影响您分配决策的因素之一，投资者希望您能够详细阐述他们对投资组合的表现的影响。提供“ESG特征是恢复和风险的正面或负面贡献者的问题”并“过度的相对性能可以归因于ESG？”提高透明度，帮助投资者了解ESG集成的重要性，以及任何相关的权衡。但影响报告（特别是ESG基金）不应专注于金融指数;它也应该解决社会。ESG投资基金报告仍在开发中。某些经理现在为由ESG评级提供商之一计算的基金提供整体ESG分数。这些分数是基金可以提供的最基本的信息，但由于他们缺乏意义和透明度，他们有点帮助。一种更先进的影响报告形式可能涉及披露某些ESG主题（例如，碳排放，首席执行官支付，多样性指标）对基金的表现而与适当的基准。 For more specialized strategies, such as those specifically aimed at addressing climate change, adopting a reporting framework in line with the appropriate metric providers — in this example, the Task Force on Climate-Related Financial Disclosures — would be important to illustrate that you are meeting the strategies’ goals. Ultimately, reporting should reflect the portfolio’s financial, social, and environmental performance, transparently capturing environmental, employment, and product impacts as described by the影响加权账户计划。In other words, a comprehensive report should disclose the impact-weighted profitability of the portfolio relative to the impact-unweighted one. By transparently disclosing details of your portfolio’s impact, you are again differentiating your offering and, critically, gaining credibility as an expert in the field, mitigating track record–related concerns.

5. Know your Audience:At the beginning, it is important to allocate your resources prudently and focus on attracting clients who are most likely to support you at this early stage. Approach clients for whom your strategy serves as a solution to gaps in their portfolios and concerns they have already identified. When it comes to sophisticated institutional allocators, understand their stance on ESG investing. Is there top-management support? Have they made public commitments on ESG integration? Have they made unfavorable headlines for ESG-related reasons? Is the regulatory environment urging them to increase allocations to ESG funds? Explain why your solution is relevant to them and how it can help them to achieve their objectives. Further, move away from the thinking that one or two investors will bring the fund to the desired asset levels. Focus on smaller opportunities that are more likely to materialize. For example, family offices tend to have more relaxed requirements and a greater appetite for innovation than bigger institutional investors. Importantly, their client bases may have strong views on ESG concerns, and they might like to see their investments having an impact on them. By “knocking on the right doors,” you are increasing your chances of solving the chicken-and-egg problem.

Conclusion

On August 2019 the leaders of the world’s biggest corporations signed adeclarationstating that the purpose of a company is beyond profit. Larry Fink, the CEO of BlackRock — the world’s biggest asset manager, with assets under management of more than $7 trillion — sent a信件在2020年1月的首席执行官断言“一家公司无法达到长期利润，而不考虑广泛的利益攸关方。”2020年10月，IFRS基金会，举办国际会计准则董事会工作的组织，指导在144个司法管辖区的财务报告中，向创建可持续性标准委员会提出意见提出意见。一组33个机构投资者，代表5亚博赞助欧冠.1万亿美元的资产，拥有committedto transitioning their investment portfolios to net-zero greenhouse gas emissions by 2050.

All of this is an indication that the attention to ESG investing has never been bigger and that investors will keep increasing their allocations to ESG funds. There has thus been a dramatic increase in the quality of human capital attracted by sustainable finance. Professionals with advanced skills and diverse experiences are now entering a realm that had been considered niche. They will be applying those skills to allocating capital in a manner that will finance and support sustainable corporate strategies, as well aspurpose-driven组织有助于解决世界上最紧迫的问题。因此，ESG基金管理人员成功的概率将增加。

因此，虽然可能更容易受到沮丧和投掷毛巾，但从过去的学习是至关重要的，承认这一前所未有的机会，并在您的投资哲学核心核心可持续性，以便出现胜利。

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Gabriel Karageorgiou是Arabesque资产管理的合作伙伴。George Serafeim是Charles M. Williams商务管理教授和哈佛大学商学院的影响加权账户项目的教师主席。2013年，与Sakis Kotsantonis一起，他们共同创立了ESG咨询公司KKS顾问。