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A new leaf for equity

22/07/2017

Note: Technical terms are marked with a * and explained in the Glossary.


Climetrics provides ratings on funds that the ‘retail’ investment market [1] can access. It is a joint venture between the various parties mentioned below, and is the first rating tool for equity funds.[2]

Nico Fettes, Project Lead for Fund Ratings at CDP Europe

“The idea was born in 2014,” explains Nico Fettes, Project Lead for Fund Ratings at CDP Europe, which, with the SouthPole group (now a part of ISS Ethix), was one of the founding organisations.  “The aim was to open the possibility to the retail market of integrating climate impact into their decision-making on their investments.”

The need for such a tool had become apparent to Fettes himself (who joined the project in 2015) during some ten years working in the investment fund industry, in both fund administration and sales.  He also had a spell in asset management*, working for a  life insurance company in Germany as a fund analyst, selecting funds on behalf of the insurance beneficiaries.  Increasingly the mandate he was given for selection included sustainability.

“Knowing how the industry works, its value chain, and how funds are sold,” he says, “when I heard of the idea for what has now become Climetrics I thought, ‘that’s really something that might be useful in the retail market’.”

Leaves

The Climetrics tool uses two main sources to create its ‘leaf’ ratings, ranging up to 5 leaves for the best performers.  One is the CDP database of companies who sign up to disclose their carbon footprint and climate management methods, now numbering some 6000.  The other is a database maintained by Southpole (now ISS Ethix) that provides emissions estimate for companies not reporting these through CDP.

Development of the system has been funded by the EU’s Climate-KIC [add link], and other partners in the 18-month development phase were Hamburg University and the Henley Business School in the UK.  Rating calculations are undertaken by the Centre for Social and Sustainable Products (CSSP, which operates the yourSRI responsible investment platform).

Climetrics covers only listed* equity funds across 15 EU countries at present, with basic data on the funds pulled in from Thomson Reuters.  Since the funds rated are already on CSSP’s database, no permission is required to perform the ratings. The 2,800 funds covered have assets of some €2.5 trillion.

“The ratings are based on three pillars,” Fettes says, “and it’s heavily weighted to an assessment of the fund’s portfolio holdings, i.e the companies it invests in.  This has an 85% weighting in the score. The second pillar is a score for the asset manager – since these managers usually manage multiple funds, not just the one being rated. That accounts for 10% of the score and looks at issues such as the manager’s public recognition of – and action on – climate change.  That might include its proxy voting* behaviour, how across its funds it engages with companies, its commitment to the PRI’s Montreal Pledge (which commits companies to carbon disclosure), whether it’s a CDP signatory and so on.  Finally, there’s a 5% weighting for the fund’s particular investment policy – how explicit its ESG policy is, how environmental and climate change factors are taken into account.”

It’s always been the approach to reward leaders

At present, Climetrics only publishes its ratings for four- and five-leaf funds. “The reason for that,” Fettes explains, “is that it’s always been CDP’s approach to reward leaders and encourage change though recognition of their leadership. We use a normal statistical distribution of ratings, so about 1/3rd of funds score four leaves, and, with the application of additional threshold criteria, 8% (so some 220) score five leaves.”

A similar number (10%) are scoring only one leaf at present.  “There’s a correlation between how and where funds are invested and their leaf score,” Fettes explains. “Those exclusively investing in Europe and outside sectors such as oil and gas are most likely to score the highest, though, that said, the company assessment always looks at both a firm’s carbon footprint and its management performance as well as its investments.

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“Similarly funds mainly invested in emerging markets, or in sectors like O&G and mining, are less likely to achieve the highest scores.  We recognise that funds investing in emerging markets have some inbuilt difficulties, but would still like to drive change by incentivising managers of such funds to go out and speak with companies about their climate performance. An interesting phenomenon is that where funds are benchmarked to a global index or other benchmark, if managers take some active steps on climate change – for example limiting exposure to certain companies that might normally be in the relevant benchmark – that will move their score up.”

Although the ultimate aim remains to create a tool for the retail market, there is still some way to go to develop materials and ways to communicate with that market, so Climetrics is presently focussed on institutional investors. “There’s still work to do to get the system directly to retail investors and their financial advisers,” Fettes says, “but in Europe, many retail investors still use banks, for example, for advice, so by educating these institutions we are reaching this audience, indirectly at least, from day 1.”


[1] The retail market is where individual (as opposed to institutional investors) can make investments, and is generally far more tightly regulated, given that such individual investors may have far less expertise in assessing investment risks than institutions whose professional occupation it is to do so

[2] As You Sow provides a screening tool (Fossil Free Funds) that identifies funds that are fossil fuel-free. Climetrics is a rating tool, comparing funds to each other and look at a wider range of factors than FossilFree Funds, including a view on the fund provider’s public action on climate change

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