The Future of Fund Sustainability Ratings: Open Source

Last year, in our piece on the failure of fund sustainability ratings we called for a movement, for transparency in a commitment to achieving meaningful impact through investment.

To live by our principles of transparency, today Real Impact Tracker has published our ratings methodology under an open-source license.

Now more than ever, funds are marketing themselves on issues of social and environmental appeal. You'll be hard pressed to find a fund manager that doesn’t profess to be working on environmental, social and governance (ESG) impact.

Dodge & Cox, the fund manager that scored at the very bottom of our first fund rankings in late 2017, now highlights a video about their approach to ESG on their homepage. Unfortunately, with the flood of new activity in sustainable investing comes an increasing risk of greenwashing as well.

Many in the industry know that an ESG approach can simply mean a single staff member answering external queries and occasionally writing reports, leaving the fundamental culture of the organization unchanged.

Sometimes, a fund manager subscribes to an ESG data feed to check a box, without thinking too much about the ‘What’ or the ‘How’ of what the data is measuring. Or a fintech company offers a passive index focused on renewable energy or water, but doesn’t actively engage with companies it invests in, leaving retail investors with limited impact being achieved.

Part of this surge is of course following the money and the decisions people will make, such as the millennial generation who will continue to inherit great wealth. After placing their sustainability assessments side-by-side with financial performance ratings, Morningstar reports that retail investors choose the funds with high sustainability ratings which is great to see.

This ever increasing demand, however, makes it more important than ever for investors to understand which funds that claim to be sustainable or impactful are actually committed to, and are creating, positive impact.

If it hasn’t already, fund manager greenwashing will continue to erode investor trust. We believe transparency in sustainability ratings is therefore critical for building credibility, and holding fund managers accountable to measure impact activities: namely their ESG strategy, their shareholder engagement, and public sphere advocacy.

Accountability requires transparency, and transparency involves collaboration. In fact, this model powers the modern world through Free and Open Source Software. Nearly all website servers, the phones in your pocket, and that smart toaster, run on a core of software that is free to use and modify, a product of collaboration across the tech industry.

We’re open-sourcing our methodology because the pursuit of real impact is best done with contributions from all perspectives. Our methodology began with our own extensive academic research. After a year of speaking with fund managers with nuanced views of impact, we refined our metrics. We then put our methodology through the review of top experts in the ESG field.

Now, we invite you to help create the future of fund sustainability ratings such as can be seen here: https://realimpacttracker.com/methodology.

Here’s how our open-source license works.

If you want to apply our methodology to evaluate your own funds, go for it. If you want to act as a consultant and use the methodology as part of a deliverable, it’s free for you.

In fact, we want you to — we want your insights and perspectives to help us achieve the most impact. In keeping with our license, we ask that you submit any modifications back to us ‘upstream’ so that we can all grow together through improvements and iteration. And if you reuse or modify our methodology as part your own project, disclose the methodology part under the same open license.

Now that our core work is free, where do we fit in? We believe open sourcing our methodology actually expands our horizons to evaluate and promote holistic impact. We can work with you on the following:

1. Certification and Gap Analysis

We conduct deeper dive institutional assessments to verify impact activities across public and non-public funds. Our growing Certified Community highlights early movers and leaders in the field. We also conduct gap analyses for institutions beginning to consider ESG, including assessing internal culture to suggest practical next steps that increase impact. We believe we must be honest critics of financial services, an industry which badly needs to embrace stronger culture oriented around sustainability.

2. Feed of the results of the methodology

Our fund rating methodology can be applied to a comprehensive universe of funds globally. We’re happy to provide this data feed as a subscription to brokers, financial advisors, asset owners, and investment consultants, as a decision-useful, simple, broadly comparable score. We are also open to working with a foundation to make the comprehensive universe of fund ratings available to the public. We look forward to the day a large broker sees the importance of shareholder engagement, advocacy and public awareness raising, wanting to educate and encourage their clients as a market advantage.

3. Expanding to companies

We have heard interest in applying our approach — which focuses on management’s strategy and holistic actions, rather than simply backward-looking outputs — to the universe of listed companies. As we’ve increasingly seen, such as with California utility PG&E or years ago with VW’s emissions scandals, the biggest ESG disasters manifest when senior managers decide to fight against environmental and social issues instead of embracing and advocating change for the better.

We’d like to take a moment to thank some of our advisors and peers who provided feedback during the months leading up to this announcement: Andrew Behar, Nick Robins, Amr Addas, Rob Berridge, Lucia von Reusner, Michael Kramer, Josh Zinner, Sophie Purdom, Tanya Khotin, Russell Heller, and Paul Rissman.

We also thank our Certified Community for being fully supportive of our move to open-source our methodology to help the field gain a greater understanding of their leadership in impact investing. Members of the Certified Community include Walden Asset Management, Stewart Investors Sustainable Funds Group, Terra Alpha Investments, Zevin Asset Management, Stance Capital, the RBC Global Equity Team, Boston Common Asset Management, and Praxis Mutual Funds

View the open source methodology and contribute at realimpacttracker.com/methodology.

On this page, to demonstrate the methodology “in-action”, we’ve applied our methodology to score 7 ESG funds from mainstream fund managers compared to the average score of our Certified Community.

You can also find this piece at our Real Impact Tracker blog and on Medium.