<The Real Impact Methodology, a method for assessing the environmental and social impact of investments>
Copyright (C) 2019 by Real Impact Tracker, a Delaware Public Benefit Corporation
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This scoring system is meant to assess the positive societal impact of investment funds, especially public equity funds. We hope to add value not through collecting new data, but by analyzing existing data and determining what information is truly relevant to assessing a fund’s impact.
This ranking poses the question “is the fund having as much impact as it can?” For this reason, funds of any size can receive the maximum score.
Scoring rubrics are different for funds that invest in different geographies. This is because formal engagement (Shareholder resolutions) is well developed and has strong legal protections in the U.S. Therefore, funds can create impact through the resolution process in the U.S. Informal engagement (outside of the proxy process), becomes more valuable outside of the U.S. There is infrastructure in place for these investors to participate in significant dialogue and create impact in non-US developed markets. In developing markets, engagement is more nascent, and funds create more impact by signaling the importance of ESG through investment strategies, and supporting a strong ESG policy and regulatory environment. Real Impact Tracker will watch this space closely over the next few years and adjust accordingly as more firms engage in developing markets.
Category |
USA (>40% assets) |
GLB Developed Markets |
EM Emerging Markets |
|---|---|---|---|
| ESG Investing | 120 | 120 | 125 |
| Shareholder Advocacy (Formal) | 45 | 30 | 19 |
| Shareholder Advocacy (Informal) | 45 | 60 | 51 |
| Public Sphere (Policy + Public) | 54 | 54 | 60 |
| Public Sphere (Growing The Field) | 36 | 36 | 45 |
| Total | 300 | 300 | 300 |
By impacting demand for a company, ESG investing can positively impact the stock price of high-ESG performing companies, and negatively impact the stock price of low-ESG performing companies, which affects cost of capital. Additionally, investors can spread the word about ESG to increase the adoption of ESG strategies. Most importantly, ESG investors that perform well may attract new dollars to ESG investing due to institutional herding.[1] [2] High performing ESG strategies bring increased credibility and attention to the field. Similarly, poor performers may deter potential ESG investors. A number of surveys show that a major factor holding people back from ESG investing is the perception of underperformance.[3] [4]
Positive screening has more impact than negative screening under the assumptions of the efficient markets hypothesis. Because efficient markets assume no capital constraints, an amoral investor could allocate limitless capital towards stocks perceived to be undervalued, negating any price impact of negative screening. Note that under inefficient markets, there is no apparent relationship between the price impact of a screen and its direction.
| Points (USA) | Points (GLB) | Points (EM) | Investment Strategy |
|---|---|---|---|
| 0 | 0 | 0 | No ESG integration (NA) |
| 6 | 6 | 9 | Website/marketing materials/pri report - mentions ESG (I) |
| 12 | 12 | 15 | Negative Screen Only (H) |
| 18 | 18 | 24 | Website/marketing materials/pri report - Describes ESG process (G) |
| 21 | 21 | 30 | Official filings - Considers ESG factors in principal investment strategies, not specific about what the factors are or how they play into decision making process or outsources ESG decisions (F) |
| 27 | 27 | 36 | Algorithmic - integrates ESG as primary (ESG part of the principal investment strategies in official filings) (E) |
| 30 | 30 | 40 | Investing in solutions Passive (renewable energy ETF) (D) |
| 36 | 36 | 47 | Active - integrates ESG as primary (ESG part of the principal investment strategies in official filings) (C) |
| 42 | 42 | 53 | Hybrid ESG primary and investing in solutions (B) |
| 48 | 48 | 59 | Investing in solutions Active (A) |
| 51 | 51 | 62 | Investing in solutions Active Strategic Investor (at least 5% stake in at least one company) (A+) |
Performance calculations compare a fund’s risk-adjusted returns to its market benchmark. There are a number of ways to calculate risk-adjusted performance, each with their own merits and drawbacks, so the specific implementation is left up to the discretion of the reviewer that applies the methodology. In line with industry standards, we use a composite metric that includes a fund’s sharpe ratio and information ratio.
For each trailing time period, funds are awarded 0.1 performance points for each % of risk-adjusted outperformance (-0.1 for each % underperformance). Performance points are capped at 1 per time period. Total performance points is the sum of performance points for each of the three time periods.
If funds haven’t existed for a full time period, they receive zero points for that time period. If the fund has no ESG strategy, they receive 0 performance points, because the fund’s performance says nothing about the viability of ESG investing.
Score = (9 * Total Performance Points)
| Points (All) | Performance Points |
|---|---|
| -27 | -3 (min) |
| 0 | 0 |
| 9 | 1 (arbitrary example) |
| 27 | 3 (max) |
By conducting ESG research, fund managers accrue knowledge and expertise, which bolsters the ESG investing sector overall. It highlights the breadth and depth of ESG strategies, and brings credibility and attention to the field.
| Points (USA) | Points (GLB) | Points (EM) | ESG Research and White Papers |
|---|---|---|---|
| 0 | 0 | 0 | No activity |
| 6 | 6 | 9 | Published one white paper on ESG issues |
| 9 | 9 | 12 | Published one paper on ESG issues in a journal or 2+ white papers |
| 15 | 15 | 18 | Published 2+ papers on ESG issues in a journal, or one paper in a journal and at least one white paper |
| +3 | +3 | +3 | Supported third-party ESG research papers via grants or staff resources |
Fund managers that devote a portion of their portfolio to direct investments in impact themes are providing capital necessary to catalyze impactful projects.
| Points (USA) | Points (GLB) | Points (EM) | Slice of portfolio dedicated to private impact/community investment |
|---|---|---|---|
| 0 | 0 | NA | No |
| 9 | 9 | NA | Yes |
The following categories assess the institutional commitment to the ESG strategy of the fund. More commitment leads to more resources invested in ESG, leading to better implementation of ESG strategy. A firm-wide commitment to ESG leads to a stronger position of engagement and advocacy across all funds, and the possibility of shared ESG knowledge and research. More commitment means that the ESG fund managers are more likely to be empowered to communicate the benefits of ESG, and sends a signal that the firm believes in ESG generally, and doesn’t see it as a niche strategy, leading to institutional herding effects described previously.
| Points (All) | % of institutional assets where ESG is primary (ESG part of the principal investment strategies in official filings) |
|---|---|
| 0 | <10% |
| 3 | 10-50% |
| 6 | 51-99% |
| 9 | 100% |
| Points (All) | % investment staff dedicated to ESG firmwide |
|---|---|
| 0 | <10% |
| 3 | >10% |
| Points (All) | Most senior staff member devoted to ESG implementation |
|---|---|
| 0 | Below Chief-level |
| 3 | Chief-level or board |
Shareholder resolutions have contributed to significant changes in corporate policies and practices. Companies often adopt shareholder resolutions that go to vote, and since 2010, around 40% of shareholder proposals on ESG issues have been successfully withdrawn.[5] Multiple analyses suggest that withdrawn shareholder resolutions are generally substantially implemented.[6] [7]
| Points (USA) | Points (GLB) | Points (EM) | Pro-ESG Shareholder Resolutions Filed (lead or co-file) |
|---|---|---|---|
| 0 | 0 | 0 | No resolutions filed |
| 6 | 6 | 3 | Filer of 1-3 shareholder resolutions |
| 12 | NA | NA | Filer of 4 or more shareholder resolutions |
A number of factors lead to a higher chance to shareholder resolution success
-
Fund managers that are lead filers of resolutions receive extra points because lead filing signals increased commitment and effort put into changing the company.
-
Filing multiple shareholder resolutions on the same issue leads to higher shareholder support.[8] Persistent engagement familiarizes management and shareholders with the resolution issue, and signal that it is an important and lasting consideration.[9]
-
Resolutions that are withdrawn are generally substantially implemented, leading to impact.[10] [11]
-
Though there is a small sample size, resolutions that achieve majority support are generally substantially implemented, leading to impact.[12]
-
Shareholder resolutions on new issues can start a conversation both inside and outside the company.[13] Resolutions can legitimize and bolster other actors in civil society focused on those issues.[14] Since shareholder engagement can lead to reforms at peer firms,[15] filing a new shareholder resolution can also have impact by bringing the issue to the attention of peer companies. Thus, fund managers get points for introducing new resolutions that haven’t been filed before.
| Points (USA) | Points (GLB) | Points (EM) | Shareholder Resolution Impact Factors |
|---|---|---|---|
| 0 | 0 | NA | NA |
| +3 | +3 | +2 | If lead filer of at least one resolution |
| +3 | +3 | NA | Persistence: Filer of same resolution with same company for multiple years |
| +3 | +3 | +2 | At least one resolution successfully withdrawn or received majority support |
| +3 | +3 | NA | At least one lead filed resolution successfully withdrawn or received majority support |
| +9 | NA | NA | If at least one resolution covers a new topic or angle |
Proxy voting is a tool for effecting change within a company. Generally, the higher percentage of a vote a resolution receives, the greater the likelihood that it will be taken seriously by management. Therefore we assign negative points to poor proxy voting records.
We look at % votes in favor of ESG shareholder resolutions when possible. If this data is not available, we look at % votes in favor of shareholder resolutions, as a majority of shareholder resolutions are ESG related. We look at % votes at a fund level when possible. If this data is not available, we look at % votes at the institutional level.
| Points (All) | % votes in favor of ESG shareholder resolutions |
|---|---|
| -35 | 0 |
| -25 | <1% |
| -15 | 1-4% |
| -10 | 5-10% |
| -5 | 10-49% |
| 3 | 50-75% |
| 6 | >75% |
| +6 | At least one vote against a director for a publicly stated ESG reason (+3 if has a policy in place to vote against directors for poor ESG performance, but did not take action on that policy) |
By communicating with more companies about environmental and social issues, investors may be able to convince more managers to implement changes. Academic literature has demonstrated a 18-60% likelihood that a shareholder engagement will be implemented by the target corporation, providing strong evidence that shareholder engagement is an effective mechanism through which investors can change company activities.[16]
The amount of resources devoted to an engagement, and the persistence of the engagement, leads to a higher chance of success. Engagement as part of investor coalitions also increases chance of success.[17] Information on private engagement is more difficult to collect, and we rely on self-reported data from a fund manager’s reports, including the PRI Transparency Report. Companies can achieve higher scores in this section if they are fully transparent about their engagement activities.
Engagement scores are calculated at the point of engagement. If an institution engages with a company on behalf of all of its funds, then all funds get engagement points. If engagement is conducted on behalf of a subset of funds, only that subset receives credit.
| Points (USA) | Points (GLB) | Points (EM) | Number of companies engaged or % of companies in portfolio engaged on ESG issues (whichever is higher) |
|---|---|---|---|
| 0 | 0 | 0 | 0 / 0% |
| 3 | 3 | 3 | 1-100 / <25% |
| 6 | 9 | 9 | >100 / >25% |
| Points (USA) | Points (GLB) | Points (EM) | Number of companies collaboratively engaged or % of companies in portfolio collaboratively engaged on ESG issues (whichever is higher) |
|---|---|---|---|
| 0 | 0 | 0 | 0 / 0% |
| 3 | 3 | 3 | 1-100 / <25% |
| 6 | 9 | 6 | >100 / >25% |
| Points (USA) | Points (GLB) | Points (EM) | Number or % of companies in portfolio engaged comprehensively on ESG issues (whichever is higher, includes bilateral or collaborative). We use the PRI’s definition of comprehensive engagements: “engagements that involved multiple, substantive and detailed discussions or interactions”. Any in-person collaborative engagement (as opposed to a sign on letter) counts as comprehensive as well. |
|---|---|---|---|
| 0 | 0 | 0 | 0 / 0% |
| 3 | 3 | 3 | 1-20 / <5% |
| 6 | 6 | 6 | 21-60 / 5%-15% |
| 9 | 12 | 12 | 61-120 |
| 15 | 18 | 18 | >120 / >30% |
If only the % of engagements that are comprehensive are reported, the following table is used
| Points (USA) | Points (GLB) | Points (EM) | % of engagements that were comprehensive |
|---|---|---|---|
| 0 | 0 | 0 | 0 / 0% |
| 3 | 3 | 3 | 1-20 / <5% |
| 6 | 6 | 6 | 21-60 / 5%-15% |
| 9 | 12 | 9 | 61-120 / 16%-30% |
| 15 | 18 | 15 | >120 / >30% |
Company commitments to change indicate real world impact that a fund manager has, but this is not a perfect measure. Commitments secured are self-reported by fund managers, and different fund managers may have different standards for assessing a commitment to change. Commitments to disclosure are worth half as much as commitments to changes in corporate policies/practices. Additionally, commitments to change do not necessarily signal major impact. Thus, metrics assessing investor effort are more heavily weighted.
| Points (USA) | Points (GLB) | Points (EM) | Number of Company Commitments to Change following Engagements |
|---|---|---|---|
| 0 | 0 | 0 | <5 |
| 3 | 6 | 3 | 5+ |
Leadership of collaborative engagements is crucial to their existence and success. Success rates are elevated when there is a lead investor who heads the dialogue.[18] Engaging with companies on novel issues can raise those issues to the attention of the company from a legitimate source. When done publicly in collaboration with other investors, these novel engagements can contribute to the development of campaigns around those issues, and bolster other actors in civil society focused on those issues.[19] Shareholder resolutions on new issues can start a conversation both inside and outside the company.[20]
| Points (USA) | Points (GLB) | Points (EM) | Engagement Impact Factors |
|---|---|---|---|
| 0 | 0 | 0 | N/A |
| 3 | 6 | 3 | Co-lead one collaborative engagement |
| 6 | 9 | 6 | Primary lead on one collaborative engagement or co-lead on 2+ collaborative engagements |
| 9 | 12 | 9 | Primary lead on 2+ collaborative engagements |
| +3 | +3 | +3 | Engagement on at least one novel issue |
Some academic literature has argued that management may make commitments to change without actually changing.[21] Thus, monitoring of engagements is important to creating impact.
| Points (All) | Monitoring of ESG Engagements |
|---|---|
| 0 | Does not monitor company actions, with a process to follow up when goals aren’t met |
| 3 | Monitors actions and has process for when goals are not met |
Public policy is crucial to create ESG impact at scale. Investors have participated in successful joint statements to publicly endorse certain policies, and have directly lobbied policymakers and regulators.[22] We do not award funds points for participation in non-ESG related public policy. In addition to work on public policy, public statements to large numbers of companies (such as public letters to portfolio company CEOs) can signal public commitment, bring awareness to an ESG issue, and help move companies take action. Some fund managers make public statements that are anti-ESG, or aim to limit shareholders’ abilities to promote ESG issues. These statements receive negative points
| Points (All) | ESG public statements/comments/letters |
|---|---|
| -3 | For each public statement that is anti-ESG, or aims to limit shareholder rights |
| 0 | No ESG related public statements |
| 3 | 1-5 public statements/comments/letters in support of ESG aligned public policy/regulation. Also each public letter/commentary supporting ESG at all portfolio companies (e.g. letter from manager CEO calling on companies to increase their board diversity) |
| 6 | 6+ public statements/comments/letters |
| Points (All) | Leadership in ESG public statements/comments/letters |
|---|---|
| 0 | No leadership in ESG public statements/comments/letters |
| 6 | Co-organized 1 public statement |
| 9 | Organized 1+ public statement or co-organized 2+ public statements |
| Points (USA) | Points (GLB) | Points (EM) | ESG Direct interactions with policymakers or regulators |
|---|---|---|---|
| 0 | 0 | 0 | No Direct Policy interaction |
| 3 | 3 | 6 | Direct (nonpublic) written communication with policymaker/regulator advocating for a particular issue |
| 9 | 9 | 12 | In-person communications with policymakers/regulators on the topic of ESG |
| 12 | 12 | 18 | In-person communications with policymakers/regulators advocating a particular ESG issue |
Fund managers send important signals to influence the general public. They can also contribute to movements targeting the public reputation of companies. Divestment is a common tactic to affect a company’s reputation by creating public stigma.[23] Asset managers can allow people to participate in a movement by offering a movement-aligned product, such as a fossil fuel free investment product. Further action to catalyze a movement helps the movement gain credibility and momentum.
| Points (All) | Movement alignment, support, and catalyzation |
|---|---|
| 0 | No movement activity |
| +3 | Fund is invested in alignment with a social movement (like fossil fuel divestment) |
| +6 | Publicly advocates for a social movement |
| +9 | Collaborates with civil society or social movement leaders on one or more specific campaigns. |
ESG promotion in the public sphere helps familiarize people with the benefits of ESG investing and grow public interest in ESG strategies.
| Points (All) | ESG promotion directed at the general public |
|---|---|
| 3 | If the fund manager promotes ESG in blog pieces displayed publicly on the website, or is mentioned/quoted on ESG in the media. |
| 6 | Publish 1 piece in the media promoting ESG, or has a media piece cover the firm’s ESG work |
| 9 | Publish 2 or more pieces in the media promoting ESG |
Promoting ESG to other investors encourages the adoption of ESG investing strategies, as well as encouraging increased shareholder advocacy and public sphere work. Creating standards and benchmarks helps other investors invest for ESG and have a framework for engagement.[24]
| Points (USA) | Points (GLB) | Points (EM) | Promoting ESG among other investors |
|---|---|---|---|
| +6 | +6 | +9 | Developed standards/benchmarks/metrics around ESG |
| +6 | +6 | +9 | Advised institutional investors on adopting or improving ESG strategies |
| +3 | +3 | +3 | ESG workshops/trainings/lectures |
| +3 | +3 | +6 | Spoke publicly at one or more conference/event in support of ESG |
Organizational memberships can indirectly develop the field of ESG and have the same impact of increasing the ESG activity of the rest of the investment field. Organizations that promote responsible investment generate awareness and better execution of ESG investing. Organizations that coordinate shareholder engagement also have impact by introducing investors to engagement topics, facilitating dialogues between fund managers and company management, lowering the costs of coordinated action,[25] and increasing the salience of fund managers engaging as part of a coalition.[26] Organizations that coordinate public policy statements allow investors to amplify their voice on ESG-aligned public policy issues.
| Points (ALL) | Number of memberships |
|---|---|
| 0 | No memberships |
| 3 | 1-9 memberships |
| 6 | 10+ memberships |
Some organizations promote anti-ESG policies and practices, or aim to limit shareholders’ abilities to promote ESG issues. Membership and leadership in these organizations merits negative points
| Points (All) | Fund manager has memberships in organizations limiting shareowners’ ability to promote ESG issues |
|---|---|
| -12 | At least one membership in an organization that is anti-ESG, or aims to limit shareholder rights |
| -24 | At least one leadership position in an organization that is anti-ESG, or aims to limit shareholder rights |
| 0 | If the fund manager has publicly stated its intention to improve its organizations’ anti-ESG policies |
The more involved a member is in an organization, the more it helps to drive the organization’s impact. Board memberships, governance committee memberships, and leadership in committees/working groups/projects receive extra points.
| Points (ALL) | Number of organizations with leadership position |
|---|---|
| 6 | 1 leadership position |
| 9 | 2-3 leadership positions |
| 12 | 4+ leadership positions |
Size
While, all else equal, a larger investor will be more effective in influencing companies and the public, it is not immediately clear that an individual should choose to add dollars to a larger fund, because adding dollars will also have a larger percentage contribution to a smaller fund’s effectiveness. Because of the uncertainty, we do not factor size into our methodology.
Another term for this is Social Return on Investment (SROI) - the dollar value of public benefit. We assume constant returns to scale for SROI based on fund size.
Values
This methodology is for environmental and social impact, not for rating the politics of a fund manager. As such, it is important for this methodology to maintain value neutrality beyond core environmental and social principles. For example, fund managers would not receive credit for supporting climate denial, but they would receive equal points for advocating a cap-and-trade versus a carbon tax.
Purview
This methodology is for assigning ratings to individual funds. Some of the criteria pertain to the asset manager's activities overall. But the methodology supports different rankings for different funds under a manager.
Data
This methodology was designed with an eye towards which data are publicly available. Most of the requisite data are disclosed by members of the UN PRI. Other data are publicly available but not necessarily in a database, such as social movement alignment or research prolificacy.
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http://econdse.org/wp-content/uploads/2013/04/herd-scharfstein.pdf
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https://www.cfainstitute.org/en/research/survey-reports/esg-survey-2017
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https://www.callan.com/wp-content/uploads/2018/07/Callans-2018-ESG-Survey.pdf
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Ceres, Investor Power: Shareholder Success on Climate, Energy & Sustainability, February 2012
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https://www.slideshare.net/slideshow/embed_code/key/E28F5ODb5Rk2tu
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Ceres, Investor Power: Shareholder Success on Climate, Energy & Sustainability, February 2012
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https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=2384280
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https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=3289544
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https://www.slideshare.net/slideshow/embed_code/key/E28F5ODb5Rk2tu
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https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=3209072
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https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=2384280
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http://www.ussif.org/files/Publications/USSIF_ImpactofSRI_FINAL.pdf
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http://www.smithschool.ox.ac.uk/research/stranded-assets/SAP-divestment-report-final.pdf
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https://www.slideshare.net/slideshow/embed_code/key/E28F5ODb5Rk2tu
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https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=3209072