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Posted On: 12/17/2024 4:38:43 PM
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Study Highlights the Need for Investors to Ensure Their Portfolios Reflect Their ESG Values
A new study has shed light on the huge differences between how stock mutual funds operate and what they claim to do when it comes to matters concerning ESG. The study was carried out by assistant professors of finance Simona Abis and Andrea Buffa at the Leeds School of Business, in partnership with Columbia University PhD candidate, Meha Sadasivam.
Their objective was to categorize ESG funds more accurately by conducting an analysis of the investment strategies outlined in their mutual fund documents.
For starters, the investigators ascertained which funds had ESG-related strategies, from a huge pool of actively managed mutual funds that invest mainly in American stocks. Once this was done, they went through each prospectus, which provided them with more details.
In a working paper, the investigators classified the funds into 3 types, based on their findings. They included:
Opportunistic
According to the investigators, funds classified under this considered ESG factors but only so they could improve their evaluation of a firm’s return potential and/or its risk factors. Consequently, these funds may invest in firms with lower ESG ratings if they can deliver higher returns.
Impact
Funds classified under this considered ESG factors and even went as far as to assess company stocks for their impact on the environment and society. For instance, these funds may prioritize firms with positive community engagement as this ranks higher than returns.
Exclusionary
According to the investigators, funds under this category exclude specific stocks that don’t align with their values-based or ethical criteria. Investigators posit that these funds may, for instance, eliminate firms involved in firearms, tobacco, and fossil fuels or those with poor labor practices.
In addition to this, the investigators determined that 20% of funds using ESG terminology qualified to be impact funds that prioritized ESG goals that were non-financial. Abis stated that ESG labels could refer to different things, which could cause misunderstandings and even mislead investors, even when this wasn’t the intention.
She explained that in the absence of clear definitions, it was easy for investors to believe they were supporting purpose-driven programs by funds when they probably weren’t.
Abis added that while steps had been made by the SEC to develop regulations that increased transparency on ESG claims made by investment funds, there was still need for more scrutiny around how ESG investing was defined.
She noted that if funds didn’t implement standardized practices to measure ESG impact even after clearer rules had been applied, accountability would continue to be an issue.
For investors who prefer to personally select the individual companies in which to acquire holdings, it could be helpful to study the sustainability practices of different companies like First Tellurium Corp. (CSE: FTEL) (OTCQB: FSTTF) in order to learn how to quickly identify those that are committed to ESG as opposed to those that implement the barest minimum in order to retain the ESG label.
NOTE TO INVESTORS: The latest news and updates relating to First Tellurium Corp. (CSE: FTEL) (OTCQB: FSTTF) are available in the company’s newsroom at https://ibn.fm/FSTTF
Please see full terms of use and disclaimers on the ESGWireNews website applicable to all content provided by ESG, wherever published or re-published: https://www.ESGWireNews.com/Disclaimer
A new study has shed light on the huge differences between how stock mutual funds operate and what they claim to do when it comes to matters concerning ESG. The study was carried out by assistant professors of finance Simona Abis and Andrea Buffa at the Leeds School of Business, in partnership with Columbia University PhD candidate, Meha Sadasivam.
Their objective was to categorize ESG funds more accurately by conducting an analysis of the investment strategies outlined in their mutual fund documents.
For starters, the investigators ascertained which funds had ESG-related strategies, from a huge pool of actively managed mutual funds that invest mainly in American stocks. Once this was done, they went through each prospectus, which provided them with more details.
In a working paper, the investigators classified the funds into 3 types, based on their findings. They included:
Opportunistic
According to the investigators, funds classified under this considered ESG factors but only so they could improve their evaluation of a firm’s return potential and/or its risk factors. Consequently, these funds may invest in firms with lower ESG ratings if they can deliver higher returns.
Impact
Funds classified under this considered ESG factors and even went as far as to assess company stocks for their impact on the environment and society. For instance, these funds may prioritize firms with positive community engagement as this ranks higher than returns.
Exclusionary
According to the investigators, funds under this category exclude specific stocks that don’t align with their values-based or ethical criteria. Investigators posit that these funds may, for instance, eliminate firms involved in firearms, tobacco, and fossil fuels or those with poor labor practices.
In addition to this, the investigators determined that 20% of funds using ESG terminology qualified to be impact funds that prioritized ESG goals that were non-financial. Abis stated that ESG labels could refer to different things, which could cause misunderstandings and even mislead investors, even when this wasn’t the intention.
She explained that in the absence of clear definitions, it was easy for investors to believe they were supporting purpose-driven programs by funds when they probably weren’t.
Abis added that while steps had been made by the SEC to develop regulations that increased transparency on ESG claims made by investment funds, there was still need for more scrutiny around how ESG investing was defined.
She noted that if funds didn’t implement standardized practices to measure ESG impact even after clearer rules had been applied, accountability would continue to be an issue.
For investors who prefer to personally select the individual companies in which to acquire holdings, it could be helpful to study the sustainability practices of different companies like First Tellurium Corp. (CSE: FTEL) (OTCQB: FSTTF) in order to learn how to quickly identify those that are committed to ESG as opposed to those that implement the barest minimum in order to retain the ESG label.
NOTE TO INVESTORS: The latest news and updates relating to First Tellurium Corp. (CSE: FTEL) (OTCQB: FSTTF) are available in the company’s newsroom at https://ibn.fm/FSTTF
Please see full terms of use and disclaimers on the ESGWireNews website applicable to all content provided by ESG, wherever published or re-published: https://www.ESGWireNews.com/Disclaimer
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