Aussie RI managers struggle in volatile market

Oksana Patron

21 November 2022

Australian Responsible Investment (RI) fund managers performed in line with the Evergreen Responsible Investment Grading (ERIG) Index in the September quarter, which was a change from previous cycle where RI managers clearly outperformed the benchmark.

Evergreen Consultants said that highly rated RI managers continued to struggle in volatile market conditions that had seen energy and materials stocks outperform.

One of the underlying reasons was attributed to responsible investing being still relatively new in Australia and a “lack of depth in the stock” available to RI mangers, particularly those who favoured negative screening approaches, Evergreen’s investment consultant, Maximilian Mullholland-Licht, said.

“This means managers who apply negative screens are being forced into stocks that are underperforming,” he said.

Also, the analysis of portfolios’ characteristics of Aussie equity managers found that those with above-average ERIG scores had a greater exposure to the growth style, quality factors and smaller companies.

Mullholland-Licht said it was crucial to understand manager’s investment process in order to better guide portfolio construction outcomes and incorporate RI themes.

“This is more useful than only looking at holdings, which change over time or quite frequently, and can be opaque.

“A combination of both holdings-based and process-based methodologies is useful in understanding the full picture of an investment product’s approach to responsible investing and ESG,” he added.

Evergreen’s ERIG Index ratings are based on seven RI capabilities and provide a score for each category: ESG integration; negative screening; norms-based screening; active ownership; positive screening; sustainability-themed investments; and impact investing.