New Fundata ESG Ratings can help build RI portfolios

John Krisko, CFA

April 12, 2021

Fundata Canada recently launched the Fundata ESG Ratings, which allow investors to compare the Environmental, Social, and Governance (ESG) scores of funds across the majority of Fundata’s universe of mutual funds and ETFs. Powered by OWL Analytics ESG scores, this new tool combines data from numerous sources to rate companies based on 18 underlying metrics, and calculates ESG scores for each company. These scores are then aggregated at the fund level using Fundata’s portfolio data to provide a clear view of a fund’s overall ESG characteristics.

The ratings are adjusted by region at the company level, so that all mutual funds and ETFs may be ranked within a single, common universe. Over 300 ESG data points are available, from summary fund scores down to detailed company-level data. For our purposes, we will be focusing on the summary portfolio scores and letter grades. Funds are assigned an individual score for each component (E, S, and G), an overall ESG score and then a letter grade based on where they fall in the universe, with the top 10% receiving an A-grade.

Whether an investor is looking to optimize ESG ratings as part of a responsible investment (RI) strategy or simply looking to enhance their investment decision making, Fundata ESG Ratings can be helpful in a variety of ways.

All scores represent the fund’s rank in the overall universe, with 100 being the maximum.

With great ESG data comes great responsible investments

One prime example of a fund topping the Fundata ESG Ratings is Desjardins SocieTerra American Equity Fund. This fund invests in U.S. equities with an RI focus and received an A-grade ESG Rating for January 2021, having one of the highest overall ESG scores in the universe (see the accompanying graph). The fund is sub-managed by ClearBridge Investments, which incorporates RI using four strategies, including exclusion criteria, ESG practices, shareholder engagement, and collaboration on industry initiatives.

As a result, the fund is well-rounded across all ESG rankings, earning an overall ESG score of 98 with component Environmental, Social, and Governance scores of 99, 89 and 85, respectively. The fund scores highly across the board but especially outperforms on the Environmental score.

The fund’s lowest score by comparison is in Governance, with a score of 85. This value is likely depressed from holding companies that are in the process of improving their ESG practices or are targets for shareholder engagement, two concepts that fall under the strategy of “RI stewardship.” Due to the lack of immediate outcomes with this strategy, stewardship can be challenging to quantify within an empirical framework and may not be fully reflected in the governance score.

This fund exemplifies one use of Fundata ESG scores – maximizing ESG ratings within the context of an RI portfolio. A well-rounded RI portfolio will include ESG integration as well as stewardship. When used in tandem with other measures of RI outcomes, Fundata ESG Ratings are an effective tool to design and implement a focused RI strategy.

Adding ESG perspective to every portfolio

Conversely, Fidelity AsiaStar Fund follows a non-RI strategy in the Asia Pacific Equity category. The fund is an example in which Fundata ESG Ratings can be particularly useful: evaluating ESG attributes when there is otherwise limited available information.

Fidelity AsiaStar Fund, through its “regional strategy that aims to invest in the best equity investment opportunities in the Asia-Pacific region,” ends up building a portfolio of companies that also score highly in ESG metrics. The fund has an overall ESG score of 91 (see the accompanying graph) with individual Environmental, Social, and Governance scores of 87, 92, and 97, respectively.

In fact, Fidelity AsiaStar Fund scores so well that it is the only fund in the category to earn an ESG A-grade. An investor targeting exposure to Asia-Pacific equities can easily see that this fund is a clear standout from its category peers. In this way, the scores can be used to optimize ESG exposure even though RI-focused funds may not exist in the target asset class, sector, or geographic region.

These results come as no surprise. There is significant overlap between strong ESG qualities and those associated with well-run businesses, especially as knowledge and adoption of RI increases.

Whether investors are building an RI-focused strategy or looking to optimize ESG scores within their existing portfolios, Fundata ESG Ratings powered by OWL Analytics are a useful new tool in their toolbox.

For more information on Fundata ESG Ratings please visit www.fundata.com.