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SQM Research Newsletter and Ratings Update - September 2021

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ESG - How Big Is It?

by Rob da Silva, Head of Research

A quick note this month to look at the size of the ESG product space. It is undoubtedly a popular and growing area in the investment world. The earliest adopters were, naturally, charities, religious based organisations and large environmental groups. Over time, institutional investors of all shapes and sizes have taken up the mantle in a very serious way. It is now largely mainstream in the “big end of town”. The retail/wholesale investment market has taken some time before following this path, but it is definitely quickening the pace over the last 3-5 years.
 
We have taken a look at the products in our Fund Explorer tool to get a sense of the size and growth of the “ESG market” over the years. The data that follows is not, and does not pretend to be, a comprehensive and precise reckoning of the size and scope of the ESG investment world. It is merely an educated guess using a reasonably large and well curated database.
 
We found 250 products falling into the ESG camp across all the asset classes:
Most highly represented are Equities, Fixed Income and Multi-Asset. The laggards are Alternatives and Property.
 
A total of $75 billion is split across asset classes as follows:
In terms of investment structures, open-ended managed funds are the leaders of the pack.
There are certain popular and easily recognizable ‘labels’ associated with ESG products. We have done a little detective work using keyword counts in fund names and philosophy descriptions to identify these variations….
It is interesting that ESG is one of the least frequent terms, well behind Sustainability, Ethical and Impact.
 
Our final chart tracks the growth in FUM of ESG-related products over the last three decades. Notice the acceleration in the last 4 or 5 years.
The SQM Approach
 
In SQM’s experience, there are substantial differences in the implementation of ESG principles both in our rated universe and in the broader fund management industry. Examples of such variations include:
  • Hard and fast rules on what can and cannot be a potential investment. Exclusion lists are frequent and can be long and complicated … and even controversial in and of themselves.
  • Screening using an analysis of revenues from business lines that are considered “unethical”. For example, a large conglomerate company that derives x% of revenues from tobacco sales where revenues above a certain threshold will deem the stock un-investable.
  • Different approaches to a company’s supply chain, labour hire, worker safety and other practices which can qualify or disqualify the stock for investment.
  • Applying third-party ESG research as a component of determining the potential investment universe, or as part of the valuation process. There are now many large and well-known vendors who provide such data.
SQM Research recognises the many ways ESG analysis can be sliced and diced in a manager’s investment process. It is important that fund managers remain true and consistent to label. “Greenwashing” is rampant and requires careful and thoughtful analysis to uncover.
As the world of ESG remains fast-paced and evolving, SQM Research applies a logical and disciplined approach to understanding a fund manager’s ESG considerations. Without explicitly adjudicating a ‘right or wrong’ approach, SQM aims to understand and fairly review a fund manager’s ESG philosophy and process with respect to the broader investment research process and alignment with its investment mandate.

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If you thought this piece was interesting and would like to see more, sign up for the Ratings Newsletter:
 
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For further information:
Rob da Silva - Head of Research, SQM Research
Tel: (02) 9220 4606
Email: rob@sqmresearch.com.au

Louis Christopher - Managing Director, SQM Research
Tel: (02) 9220 4666
Email: louis@sqmresearch.com.au

Matt Hattersley - Head of Dealer Group Subscriptions, SQM Research
Tel: 0414 847 511
Email: matthew@sqmresearch.com.au

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About SQM Research
SQM Research is an investment research house that specialises in providing fund ratings, fund research, investment and property data to financial institutions professionals and investors.
For more information please visit www.sqmresearch.com.au
 
Research Methodology
Please see below for descriptions of each star rating, whose purpose is to act as a guide for dealer group research teams and investment committee:
4.5 stars and above - Outstanding. Highly suitable for inclusion on APLs.
4.25 stars - Superior. Suitable for inclusion on most APLs.
4 stars - Superior. Suitable for inclusion on most APLs.
3.75 stars - Favourable. Consider for APL inclusion.
3.5 stars - Acceptable. Consider for APL inclusion.
3.25 stars - Caution required. Not suitable for APLs.
3 stars - Strong caution required. Not suitable for APLs.
Below 3 stars – Avoid or redeem. Not suitable for APLs.
Hold - Rating is suspended until SQM Research receives further information.
Withdrawn - Rating no longer applies.

* The definitions above are not all-encompassing. Not all individual items mentioned will necessarily be relevant to the rated Fund. Users should read the current a comprehensive assessment.
Disclaimer
The rating contained in this document is issued by SQM Research Pty Ltd ABN 93 122 592 036. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure sta licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment.
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