A Lunch of Green Leaves

    Stockholm (NordSIP) – One of the main hurdles still facing environmental investors is the difficulty in identifying which investments suit their specific sustainability concerns. Given the vast universe of asset managers, investors need a tool to help them sort through their options. Over lunch in Stockholm, NordSIP talked to Nico Fettes (pictured right), who heads the CDP’s climate-rating project Climetrics and Torun Reinhammar (pictured left), Senior Account Manager for Investor Engagement at CDP, to discuss how Climetrics’ Leaf-based rating offers a simple solution to this problem.

    Climetrics rates close to 5,000 funds domiciled and available for sale in Europe based on their alignment with a lower carbon economy, rather than on their financial and risk performance. The initiative is a consortium run and operated by the Carbon Disclosure Project (CDP) and by ISS ESG, the responsible investment arm of Institutional Shareholder Services. The project was supported and funded by Climate-KIC, an EU initiative that sponsors climate innovation projects.

    “Climetrics ratings are freely available for everyone to see. Our goal is to create transparency and to help promote funds that are good for the environment,” says Fettes. The rating system focuses on three analytical pillars: the asset manager, the fund’s investment policy and the portfolio holdings. Based on the assessment, funds are rated from 1-Leaf to 5-Leaves, in order of increasing greenness.

    Portfolio holdings are the core pillar and account for 85% of the overall rating. “On a scale of 0-100, a fund has to receive at least 70 points on the portfolio holdings level to achieve 5 Leaves,” explains Fettes. The assessment on the portfolio holdings is based on the carbon footprint of the company, the CDP score detailing how the company discloses and manage risks and the technologies used by the company. “We penalise fossil fuels and coal power and reward the use of renewable energy and related technologies,” Fettes clarifies.

    The asset manager score represents another 10% of the total rating. “As with portfolio holdings, there is a hard threshold at the asset manager level. To obtain five leaves, a manager has to score at least 60 points,” explained Fettes.  Two important conditions weigh in. The first one aims to establish a fund’s commitment to integrating climate change into its internal assessments and relies on the UN PRI questionnaire. The second and most heavily weighted element is collective engagement. “Asset managers need to be a part of at least one of the collective climate engagement initiatives,” Fettes said. “The Global Investor Initiative on Climate Change has four regional networks in Europe, USA, Asia and Australia where asset managers can engage with policymakers. Through the Climate Action 100+ Initiative, asset managers and asset owners can come together with corporations on climate issues, such as disclosure, taking climate action, setting targets or decarbonisation. These are only two examples among many. None of these initiatives cost a lot of money, but they do require some effort and dedication on the part of the asset manager.”

    The investment policy assessment counts for the remaining 5% of the rating and focuses only on whether the fund has an ESG or SRI policy.

    The rating system can struggle to capture how an individual fund manager constructively engages with problematic companies. For example, Climetrics would be unable to fully internalise the efforts and contributions of a responsible investor that owns fossil fuel companies to engage them about climate change and help them transition into renewable energy sources. “Even though we integrate corporate disclosure quality as a future-looking proxy, a fund just focused on turning around fossil-heavy companies would not achieve a good rating,” admits Fettes. “We try to measure engagement, but it can be difficult. We cannot always capture what is happening behind closed doors, where many of these efforts are discretely taking place.”

    On the other hand, it seems difficult to cheat the Climetrics system. It would be impossible to create a passive fund that simply optimises the MSCI World index to achieve a 5-leaf rating, for example. “Given the way Climetrics currently penalises certain fossil-fuel holdings, sector neutrality on a global index is not easy to maintain,” Fettes explains.

    Despite some remaining resistance from some managers, Fettes remains optimistic about the future. “We want to make sure that they understand what we are doing and that they are comfortable with the way we assess them,” says Fettes. “Our methodology is fully transparent, and we need to develop this market. Our mission is to make this information available to everyday investors. We want to be able to present them with the climate information at the point of sale.”

    Picture © NordSIP

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.
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