More clarity needed on ESG

Thursday 19th November 2020 Penny Pryor

Aman Ramrakha Australian investors are becoming more focussed on environmental, social and governance (ESG) factors but there is greater need to understand what a product does in an ESG framework, according to Aman Ramrakha, director of manager research ratings, Asia-Pacific, at Morningstar.

Morningstar has just introduced a global initiative to assign fund managers a qualitative ESG Commitment Level on a four-point scale of Leader, Advanced, Basic, and Low.

Ticket to the game

“You’ve got product differences sitting in the market …Part of what we ware trying to do is provide a bit more clarity,” Ramrakha says.

At this stage, the Commitment Level will not be incorporated into the Morningstar Analyst rating for an asset manager but could be at some point in the future.

"We may get to a point where we have a good subset of our managers that we think quite highly of from an analysts point of view, scoring quite low on an ESG point of view. I think more and more managers will try and do better on an ESG point of view,” Ramrakha says.

For institutional investors, ESG is already a “ticket to the game” but on the retail side investors are still undergoing an educative process around what ESG means for them and how that aligns with the investment choices on offer.

“You have to some ESG merit to run money on behalf of super funds and institutional investors,” Ramrakha says.

Australia getting on board

Morningstar will start the process by assigning the Commitment Level to ‘intentional’ ESG strategies but plans to cover the majority of the asset managers it analyses to enable investors to compare any manager’s approaches to ESG.

In a global sense, Ramrakha expects European fund managers to be the better performers on ESG awareness but is optimistic that Australia is catching up. “In Australia I think almost all managers will have some regard to ESG there is probably very few who say I don’t think of ESG at all in may process,” he says.

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