Seven ESG Due Diligence Questions Every Advisor Should Ask

Posted by Dana Funds Investment Team on Jul 30, 2020 8:52:30 PM

As investor interest in ESG grows, so too are the number of ESG strategies to choose from. Already, 23 ESG funds have launched in 2020, and more than 20 others are in registration at the SEC, according to Morningstar.¹ This marks the sixth straight year of more than 20 launches.

With more fund launches, due diligence isn’t getting any easier. We believe one way advisors and other allocators can help their clients find the right strategy is to ask whether they want a fund that is directly engaging businesses to improve corporate policy around ESG issues.

Many ESG funds do not engage management teams on policies, but instead rely on ESG ratings to screen out non-ESG friendly companies and include companies with better ratings. That may well be enough for some clients.

At Dana, we use ratings, but they are only a single piece of the puzzle. We also rely on our own ESG analyst for independent analysis, and push companies to address ESG concerns through a host of initiatives. We believe such a strategy may be preferable to investors who have chosen ESG because they want to see businesses improve their incorporation of ESG principles.

In a recent investment brief, we shared some of the due diligence issues that are arising as more clients show interest in ESG and as more funds dedicated to the practice proliferate. In one section, we shared a list of questions advisors should ask ESG managers to help pinpoint the right strategy for their clients. Those questions include:

  • How long is your history in the ESG space?
  • Does your firm simply exclude non-ESG friendly companies, or do you have a dedicated process for selecting and evaluating companies on ESG criteria?
  • Does your firm have a dedicated ESG analyst?
  • Do you rely on external ESG ratings for investing, or do you do your own research?
  • What are your structural risk controls to ensure the strategy does not stray too far from its benchmark?
  • How often have you voted proxies independent of management?
  • Can you share a story that highlights your team’s corporate engagement?

To learn more about some of the issues advisors and clients should consider when entering the ESG space, download our full paper: ESG Due Diligence: How Advisors Can Navigate the Growing Field of Funds.

 

ESG Due Diligence: How Advisors Can Navigate the Growing Field of Funds

 


¹https://www.morningstar.com/articles/989209/esg-funds-setting-a-record-pace-for-launches-in-2020

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The Dana Funds are distributed by Ultimus Fund Distributors, LLC. There is no affiliation between Ultimus Fund Distributors, LLC. and the firms referenced in this blog post.