Welcome to the January 2023 Manager Panel! The Manager Panel is where we ask fund managers some questions surrounding a topic. This month we asked Harbour Asset Management and Pathfinder, some questions in relation to the Environmental, Social and Governance (ESG) world of investing. Check out the questions and answers below.

Q1: Given every investor has their own unique sustainable investment goals, could you please outline what Harbour’s overarching Environmental, Social and Governance (ESG) investing objectives or strategies are, and why you selected this approach over others?

Harbour offers investment funds that primarily apply an ESG integration approach, reflecting our belief that ESG issues influence investment risk and return and integrating these will strengthen decision making.

We acknowledge that every investor’s sustainability goals or definitions of ethical/responsible investing are unique, which is why our approach involves multiple elements including engagement, exclusions (we do not invest in companies involved in controversial business activities likely to lead to societal harm such as tobacco and military weapons), and bottom-up company assessments of sustainability performance. We believe these strategies are not mutually exclusive and can be used as complementary tools to achieve better sustainability outcomes for investors over any individual strategy alone.

For those investors with a wide range of ethical concerns or those that wish to invest in companies creating a positive impact, we offer investment products that are specifically catered towards these goals as well.

Q2: Even ESG rating providers can take opposing sides on whether a particular investment is considered ‘sustainable’ or not – as a fund manager, how do you navigate these differing views and decide what meets the ‘sustainable’ criteria for your own funds, when there are often no clear-cut ‘right’ or ‘wrong answers?

Assessing sustainability performance can often be an art as well as a science because there is room for different interpretations of the data. This is why we believe it is important to use a range of sources for ESG information and not take any particular provider’s view as the universal truth.  It is also valuable to gain an understanding of each provider’s methodology of their ESG data or ratings, to get a sense of the assumptions and limitations of them and better inform our view of a particular investment or fund screen.

At Harbour, we use a combination of in-house research and external ESG rating providers to get a balanced view of sustainability performance. Our choice of ESG providers is reviewed on a regular basis to ensure consistency with our overarching responsible investing philosophy and whether they are best meeting our needs given the rapidly evolving nature of the industry.

Q3: Moving forward, do you think there will be a consolidation of overarching ESG investing principles and frameworks applicable within the industry, and if so, who do you think should be shaping this and why: the ESG data/index providers, regulators, fund managers, or the end-investors themselves?

Yes, we believe this is already in progress with the work from the recently established International Sustainability Standards Board (ISSB). They are currently developing global sustainability reporting standards aimed to consolidate and standardise the disclosure of ESG information amongst reporting entities. This information in turn will create much better transparency and comparability, facilitating fund managers to enhance their ESG investment strategies that will ultimately improve outcomes for end-investors.

The ISSB has taken a collaborative approach, working with existing standard setters like the Global Reporting Initiative (GRI), and have built on the work of existing frameworks such as the Taskforce on Climate-related financial disclosures (TCFD). The ISSB have also involved feedback from investors through public consultations based on their draft standards. We believe this is important to ensure that all these views help to shape the eventual outcome of this work, leading to more informed decisions.

This article does not constitute advice to any person (www.harbourasset.co.nz/disclaimer)

Q1: Given every investor has their own unique sustainable investment goals, could you please outline what Pathfinder’s overarching Environmental, Social and Governance (ESG) investing objectives or strategies are, and why you selected this approach over others?

Responsible investing strategies vary widely, including avoiding harmful industries (exclusions), overweighting sustainable themes (thematic), voting and engaging as a shareholder to effect change (engagement) and targeting investment into companies that can create measurable change in the world (impact investing).  At Pathfinder we employ all these strategies.

Another strategy is ESG investing, which is essentially using data around environmental, social and governance policies and practices to help identify more sustainable companies.  At a high level we see ESG as a positive input to help find better companies.

While ESG data is a useful tool, it is not a ‘values’ overlay and can’t be used in isolation to identify ‘good’ companies.  Interpretation of the data, and awareness of its limitations, is important. For example, ESG may often tell you more about the internal structures of a company than the true ‘real world’ impacts it has.

We regard ESG as non-financial considerations that sit alongside financial metrics to help us understand a company (and indeed a portfolio as a whole).  In this way we use ESG as a risk metric for building better and more robust investment portfolios, which complements our other responsible and ethical investment strategies.

Q2: Even ESG rating providers can take opposing sides on whether a particular investment is considered ‘sustainable’ or not – as a fund manager, how do you navigate these differing views and decide what meets the ‘sustainable’ criteria for your own funds, when there are often no clear-cut ‘right’ or ‘wrong’ answers?

Credit ratings, which are essentially ratings of financial strength for a company, are generally very similar across the different providers (for example Moody’s, Fitch and S&P).  This is not true of ESG ratings which can vary, at times considerably, across the different providers.

ESG data is simply that – raw scoring based on a set methodology.  Not only does the methodology vary across providers, but providers can rely on slightly different data points and at times include their own estimates.  It’s therefore no surprise that different providers have different answers.

From our perspective these divergent views mean we need to:

• use ESG data from more than one provider
• understand the process behind a provider’s ESG scoring
• always question the data

Our approach is very active, using both quantitative (numbers based) and qualitative (discretionary) decision making.  We don’t see ExxonMobil or British American Tobacco as companies promoting sustainability even if some ESG providers currently score them with a pass mark.

For this reason we see the higher level of ESG scrutiny from active management as a key advantage over passive investing.

Q3: Moving forward, do you think there will be a consolidation of overarching ESG investing principles and frameworks applicable within the industry, and if so, who do you think should be shaping this and why: the ESG data / index providers, regulators, fund managers, or the end-investors themselves?

ESG frameworks have proliferated around the world – in fact there are now hundreds of different ESG reporting standards. This lack of consistency and comparability has been a hand brake on the shift to a more sustainable economy.

Standardising ESG frameworks will make it easier for investors to understand and reduce greenwashing risks.  Think of it like accounting standards, which have become standardised and well-understood within most markets. It wasn’t always like that for accounting, but necessity drove both regulation and industry practice to agree standards.

In some places, for example the European Union, progress has already been made around standardising important ESG reporting areas.

Standardisation has the benefit of consistency but can also have draw backs.  Hundreds of pages of rules can make the process complex and drive a box-ticking approach to ESG that ultimately is of low value to investors.

Our regulator (the FMA) will likely step in at some point if progress isn’t made.  For now, the onus is on the finance industry to solve this and ensure fairness to investors and transparency of information flows.  We need consistency because when it comes to investing decisions, ESG really matters.