Vanguard, Fidelity fall short in ESG fund ratings

Fund giants including Vanguard Group Inc. and Fidelity Investments Inc. have been given low ratings by research firm Morningstar Inc. in its first in-depth assessment on incorporating environmental, social and governance factors into investment decisions.

The research firm rated 40 asset managers around the world and found that more than a quarter do not integrate ESG at all or do so in a very limited way, according to a report on Tuesday. It ranked firms and funds in a four-tier scale from leaders and advanced, to basic and low.

Among the latter was Vanguard, the world’s second-largest money manager, which given a low score because sustainable strategies accounted for only a fraction of assets under management and its ESG team is relatively small.

Fidelity Investments was also given a low rating for not actively engaging with firms by writing letters or sponsoring shareholder resolutions, while its standards for environmental and social issues were too vague, Morningstar said.

These factors are becoming increasingly important for asset managers as they look to satisfy growing demand for sustainable investments. Assets in European ESG funds hit $1 trillion in September and more than 330 sustainable funds have been launched this year, according to Morningstar. The greater choice is also leading to more confusion for investors.

“Investors are expressing their investment objectives in more-encompassing terms than ever before, and they’re putting their money where their mouth is,” Haywood Kelly, Morningstar’s head of research, said in a statement.

Vanguard said it recognized that ESG could have significant impact on long-term shareholder value and so it regularly engaged with company leaders and boards on environmental, social, and governance matters.

“Vanguard’s approach to ESG is expansive, nuanced, focused on maximizing long-term value, and continually evolving,” a spokesperson for the $6.2 trillion money manager said by email.

Fidelity Investments thinks the rating doesn’t adequately reflect its “long-term commitment to ESG investing,” Pam Holding, asset management head of ESG and co-head of equities at the firm, said in an emailed statement. She highlighted its three actively managed ESG mutual funds and three index funds, plus over 400 available to investors on its platform.

SUSTAINABLE SPECIALISTS

In addition to looking at investment firms, Morningstar studied how ESG criteria are implemented at an individual fund level. The company reviewed more than 100 strategies and found that among those given the strongest ESG ratings were funds run by sustainable investing specialists Stewart Investors and Impax Asset Management.

Some funds labeled as sustainable or ESG were only offering investors "basic" ESG commitments. Natixis SA’s Sustainable Future range of funds “lack the means to implement best practices,” according to Morningstar’s report. The soft touch implementation meant investments in firms seen as ESG laggards, such as General Motors Co., Wells Fargo & Co. and Monster Beverage Corp., it said.

Natixis is confident on the standards in its ESG selection and monitoring, Edward Farrington, its head of retirement and institutional distribution, said in a statement.

The Morningstar report also noted that active strategies generally fared better than passive strategies, which are aimed at following a benchmark index rather than beating it. Most of these offered solely basic or low commitments to sustainability, by not excluding many companies, it said.

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