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Jun 24, 2021

ESG: The latest opportunity to earn commission

Huge volume of fees at stake in the coming decades

In the last 18 months sustainability has definitely made its way to the top of investors’ agendas. Gone is the old CSR driven by companies, a kind of philanthropic activity toward society or corporate marketing with little interest for fund managers.

This change in mentality, supported by the circumstances arising from Covid-19, is being driven directly by investors, both institutional and retail. There is no longer just a demand for a company to be included in a sustainability index, which in many cases had become a formal exercise of filling out surveys and forms.

Investors want to know in a concrete way about companies’ effective implementation of sustainable policies and whether the remuneration of managers is linked to the achievement of measurable ‘non-financial’ objectives. Linking financial remuneration to the achievement of these goals is probably the most efficient way to arouse the active interest of company managers.

Some funds, such as TCI, have written to the companies in which they participate and have requested ­­– and, in the case of Aena, have achieved their aim – that climate change policies be approved by the annual shareholder meeting. TCI has clearly expressed its intention to vote against the re-election of directors in companies that do not report their level of emissions or that do not have a credible plan to reduce them. Fund managers might also vote against the auditors if the annual report does not adequately reflect climate risks. The sale of the company’s shares is another possibility.

As a consequence of this new investment paradigm, the inflow of money into sustainable funds in the first quarter of this year reached $178 bn globally, according to Morningstar data, compared with $38 bn in the first quarter of 2020. That huge influx of money has had a major effect on the revaluation of many companies, and also of specific ESG indices.

The financial industry and, in particular, fund managers have reacted quickly to capture this new type of client that wants to align its investments with its values and principles. A survey by the Morgan Stanley Institute for Sustainable Investing estimates that 95 percent of millennials’ investment decisions are based not only on making money, but also on the contribution of these investments to overall social well-being.

A huge volume of fees is at stake in the coming decades. In an industry where fees are structurally trending downward, ESG funds have become the star product to attract higher volumes and charge higher fees. BlackRock has just launched the US Carbon Transition Readiness ETF with fees of 0.5 percent per year, compared with the 0.03 percent charged by other funds such as the iShares Core S&P 500 ETF, which has a very similar composition but comes without the ‘sustainable fund’ label.

The enormous effort by fund managers to attract new clients has raised alarm bells. Tariq Fancy, former chief investment officer for sustainable investing at BlackRock, has warned that sustainable investing has become a huge marketing exercise and called for regulators to intervene.

The SEC announced last March the creation of a ‘climate and ESG task force’ whose mission is to detect irregular conduct or incomplete reporting practices by both companies and fund managers. In April the SEC again published a series of recommendations, calling for greater transparency in the composition of these products. It asks fund managers to disclose the weight of ESG factors in the construction of investment portfolios, their decision-making process and the disclosure of their policies regarding the companies in their portfolios.

Last month US President Joe Biden signed an executive order on financial risks related to climate change, highlighting the request to the Treasury to incorporate this type of information into regulation and supervision in line with what is already required by the European Union.

The stock market has definitely dyed green, seeking a ‘sustainable’ generation of commissions.

Ricardo Jiménez Hernández is a partner at Sigma Rocket and a former director of investor relations at Ferrovial. This article was originally published in El Economista (in Spanish)

Ricardo Jiménez Hernández

Ricardo Jiménez Hernández

Strategic adviser at Harmon and a former director of investor relations at Ferrovial