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A Good Socially Responsible Investment (SRI) Fund is Hard to Find

Karen Guzman | September 14, 2015

As global head of research at Thomson Reuters Wealth Management/Lipper, Robert Jenkins spends a lot of time analyzing potential investment funds. Lately, he’s been investigating more socially responsible funds, since socially responsible options are increasingly being requested by employee retirement plans as well as the general investing public. But the discovery process hasn’t been easy.

Robert Jenkins

The problem, Jenkins says, is that fund managers and fund selectors have no single standard for analyzing or ranking Environmental, Social, and Governance (ESG) factors or Socially Responsible Investing (SRI) factors in funds.

“There is no uniform industry-wide way to rank and choose ESG/SRI funds,” Jenkins told an audience at the Yale School of Management on September 1. “But the momentum for a gold standard is building.”

Jenkins was the first speaker in the new Sustainability Metrics Monthly Seminar, a discussion series co-hosted by the Yale Center for Business and the Environment and the Yale Center for Environmental Law and Policy.

While interest in ESG/SRI funds is growing among investors, Jenkins says the tools for evaluating the integrity and performance of such funds are still too blunt.

“Over time we need to create a specific, analytical approach to the ESG/SRI space,” he said. “Right now it’s very gray. It’s too opaque.”

Jenkins shared some of the challenges he faces when evaluating ESG/SRI funds:

  • The coverage and extrapolation methods used by ratings agencies to evaluate and assign ESG/SRI performance data have many gaps, yielding data that can be unreliable and industry-biased.
  • Fund selectors and advisors tend to lump ESG/SRI fund performances in with broader mutual fund’s overall performance, instead of clearly differentiating the ESG/SRI funds.
  • The approaches fund managers use to rate ESG/SRI sensitive securities for weightings and allocations in their portfolios are proprietary and non-transparent and potentially leave room to be self-serving.
  • Analytics such as fund classifications and ratings used by fund selectors are tailored to cover mutual fund performance and aren’t specific to the ESG/SRI funds.
  • A general lack of expertise about ESG/SRI funds hampers fund managers and investors alike in understanding how to research products and innovate in this space.