The Impact Gap: Fund Managers and Opportunities for Meaningful Impact

With interest in sustainable and impact investing on the rise, how can the average investor tell if fund managers are doing all they can to make a positive difference? 

This question is crucial when considering the impact of the largest firms such as Fidelity, Vanguard, BlackRock and State Street (the Big Four) and smaller, more niche investors that specialize in ESG. Firms large and small have launched ESG funds with increasing frequency, but how do these fund managers actually compare on ESG and impact? Are they doing all they can or could they do more?

The chart pictured above shows the average impact score of the Real Impact Tracker’s Certified Community of leading firms in the ESG/impact space, compared to the Big Four fund managers. Scores are compared across Real Impact Tracker’s three categories of impact: ESG integration strategy, shareholder engagement, and public awareness-raising/advocacy.

The Certified Community includes Boston Common Asset Management, Praxis Mutual Funds, RBC Global Asset Management’s Global Equity Team, Stance Capital, Stewart Investors’ Sustainable Funds Group, Terra Alpha Investments, Walden Asset Management, and Zevin Asset Management.

Across all three categories, the largest firms seem to have a substantial opportunity to do better, in fact the opportunity to show leadership among their peers is very clear.

On ESG investing, the largest firms mentioned above earned 39 points, just over half of the average score of our certified community of 70. This category is led by Certified Real Impact Community Members Stewart Investors’ Sustainable Funds Group, RBC Global Asset Management’s Global Equity Team, and Terra Alpha Investments, with scores over 100. Leadership in ESG investing involves using ESG opportunity to drive idea generation for investing in solutions in an integrated fashion. We encourage the largest firms to fully consider the leadership opportunity in front of them on this basis.

Shareholder Engagement tells a similar story. Our certified community average of 56 dwarfs funds scored from the largest firms - State Street’s SHE fund, specifically built to promote women in company leadership, garners only 31 points. Zevin Asset Management, Boston Common Asset Management, and Walden Asset Management lead our certified community in shareholder engagement.

While the largest firms are increasing their activities on shareholder engagement, real impact means embracing collaboration, understanding risk exposures, engaging with companies actively and escalating action when necessary. On the other end of the spectrum, the largest fund managers have been at times criticized for their proxy voting practices, which limits the impact of peer investor work on improving corporate impact, enabling management to stick to the status quo in an age where institutional investment often represents 70% of the ownership of a given public company.

Actions in the public domain -- whether speaking publicly to help encourage growth in the field, through media appearances, published letters and papers, and participation in developing public tools and standards -- are crucial for building the movement towards sustainable investing. Walden Asset Management, Zevin Asset Management, Boston Common Asset Management, and Praxis Mutual Funds lead in this public sphere, with scores over 70. State Street’s score of 65 is on par with our Certified Community average of 63.

What explains the gap between the largest fund managers and leaders in this field? Certainly, it’s a not lack of resources.

The largest fund managers have not followed the lead of the Certified Community in developing their own strategic vision for sustainability, at a time when ever more investors are seeking to have the most positive impact with their investment dollar. Many large financial institutions have risen up successfully without needing to consider environmental and social outcomes. As a result, such organizations wouldn’t naturally have a developed culture for tackling these issues. Developing this sort of strategic vision is an opportunity for fund management at large, alongside the capacity to execute and the culture and incentives which run alongside and help transform finance into a vehicle which can deliver positive impact. Instead, often these organizations don’t have a cohesive vision or internal agreement on what the future for finance could and should be in society.

The largest firms have already begun the move in the right direction, especially in their public sphere activities. We applaud the attention they’ve brought to ESG, which has grown the field, and created positive impact. But their overall scores lag behind the certified community because their marketing often outpaces their firm-wide culture.

The good news is that the largest firms are improving over time on impact, sustainability, and ESG integration. Gaps remain in the impact of investing and will remain until firms can fully develop and articulate their vision for the future of finance. We see this as perhaps the biggest opportunity of our time for the financial services sector.

As also appeared at https://realimpacttracker.com.blog