The Dangers of Simplistic Sustainable Fund Selection

    Share post:

    Stockholm (NordSIP) – According to a report by Citywire Selector, ABN Amro closed a strategy managed by Janus Henderson based on scores from Morningstar Globes sustainability rating.

    According to the original report, “ABN Amro said the decision to redeem was made because the strategy only had two Morningstar globes out of a possible five following the November update of sustainability rating methodology by Morningstar. The revised framework relies on Sustainalytics.”

    - Partner Message -

    A Frightening Prospect

    The decision and its purported motivation elicited a strong reaction from asset managers and asset owners. Commenting on this topic, Anders Bertramsen (pictured), Head of External Products at Nordea Asset Management, expressed concern about this simplistic approach to fund selection, if the report was indeed accurate.

    “There are several aspects of this that scare me,” Bertramsen commented. “Firstly, the Morningstar Globes are a quantitative calculation, which is based on a variety of inputs that vary in quality and coverage. Secondly, Morningstar compares funds that aren’t particularly comparable, especially on the fixed income side, so you don’t get a genuine ‘apples to apples’ comparison. Lastly, the ESG ratings vary significantly across providers, which means that the final ‘rating’ of a fund will be highly dependent upon which underlying data source used. My concern is that Morningstars Globes becomes the “truth” which is very unfortunate in such a complex and subjective area as ESG and Sustainability.”

    A Holistic Approach; Not a Magic Number

    Instead, the Head of External Products argued in favour of a more holistic approach to overcome these data imperfections. “I’m very reluctant in general to ratings, being performance or ESG. Quantifying something as complex and subjective as ESG/sustainability into one ‘magic number’ is unrealistic in my view. It might be that the Globes on average if you look at 1000’s of funds will have reasonable accuracy, but as a fund selector you don’t pick averages – you pick one fund, and I don’t want to use a metric which is highly uncertain as key argument for the ultimate selection. Here I would prefer the subjective evaluation made by people with long term experience within the selection industry.”

    Bertramsen used Nordea’s approach to illustrate what a holistic approach might look like. “Within my team, we rate all managers and products based on a proprietary scale strongly linked to the UNPRI approach/methodology. We look at what the manager claims to do within ESG and we consider what their portfolio looks like. We also talk about ESG with several people at the onsite visit to understand how genuine their ESG approach. Ultimately, this is how we form our view of whether a manager is focused on ESG or not.”

    Gaming the Globes

    “It’s too early to tell whether this is the start of a trend. I have not seen other cases such as this if indeed this was the case. However, if many selectors/asset owners follow this example, then I think it will have serious ramifications for the European fund industry. In the extreme, fund houses could start ‘optimizing’ their ESG approaches to obtain as many globes as possible.”

    Image courtesy of Nordea

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.
    - Partner Message -

    Nordsip Insights

    From the Author

    Related articles