What’s in a (fund) name?
Sustainable, ESG, and Impact are in. Social and Responsible are out.
The venerable Neuberger Berman Socially Responsive Fund changed its name to Neuberger Berman Sustainable Equity Fund this month. In business since 1994, the fund is one of the most successful SRI/ESG/sustainable funds ever, in my view. With $2.3 billion in current assets, plus more in other vehicles, the fund has a 9.59% annualized 15-year return, net of fees, as of the end of April 2018 (based on the Investor share class), four basis points better than that of the S&P 500. No changes to the underlying strategy, just a name change and an update in the Prospectus describing the fund’s approach:
The Portfolio Managers employ a research driven and valuation sensitive approach to stock selection, with a focus on long term sustainability. This sustainable investment approach seeks to identify high quality, well-positioned companies with leadership that is focused on ESG as defined by best in class operating practices.
You can read the entire description of the fund’s investment objectives here. And you can read the latest (just published) Morningstar analysis of the Bronze-rated fund here.
Then on Monday, a colleague sent around an email about an SEC filing from Touchstone Funds announcing a name change for Touchstone Total Return Bond. In July, it will become the Touchstone Impact Bond Fund. No change to the subadvisor EARNEST Partners, but its claims to be assessing an issue’s sustainability profile heretofore could be read only in the fund fact sheet, not in the Prospectus. The new Prospectus will now read, in part:
EARNEST* also believes that entities that are cognizant of ESG issues tend to be more successful over time. As a result, EARNEST prefers to invest in government programs and companies that have sustainable operating models and seek to achieve positive aggregate societal impact. This inclusive approach views positive impact characteristics as additive to an investment’s risk/return profile. When assessing an issue’s impact profile, EARNEST considers a wide range of factors, including but not limited to support for economic development, home ownership, and job creation.
*This prompted a colleague to observe, “Wow, this EARNEST fellow must really like ESG!”
This got me to thinking about naming conventions, so I took a look at Morningstar’s database of intentional sustainable funds in the U.S. These are funds that have some reference to sustainable, responsible, impact, or ESG investing noted in their prospectus investment objectives.
As shown in the accompanying chart, the most popular labels are Sustainable and ESG with Impact coming on strong. References to Socially Responsible Investing (including the separate use of the terms “social” and “responsible” and the SRI acronym) is used almost exclusively by older funds.
Only 10 funds that have launched since 2015 use those more-traditional terms while 85 use sustainable, ESG, impact or some combination thereof.
A large group uses no reference word at all in their names, including Parnassus funds and most Calvert funds. But like references to SRI, this practice is also in decline. Funds launched in the past few years overwhelmingly use a term in their names to indicate their focus on sustainable investing. Among funds launched or renamed since the beginning of 2015, 100 out of 111 use a reference word in their titles.
The first use of “sustainability” in a fund name came in 2008 with Northern Trust’s launch of its Northern Global Sustainability Index Fund, followed later the same year by the DFA U.S. Sustainability Core and DFA International Sustainability Core portfolios.
ESG came along in 2010. In October, iShares renamed its FTSE KLD Select Social Index ETF, which became MSCI USA ESG Select Social Index ETF, reflecting MSCI’s acquisition of KLD.
Impact was first used in 2015, when Touchstone hired Rockefeller & Co. to subadvise a fund that had been known as Touchstone Large Cap Growth. In May 2015, it was renamed Touchstone Sustainability and Impact Equity Fund, reflecting its new subadvisor’s approach. BlackRock soon followed with the October launch of BlackRock Impact Equity.
My general preference is for intentional funds and strategies to use “sustainable” in their names. The term directly connects the investment with the broader concept of sustainability, which is really what is driving so much interest in the field. I think “ESG” and “impact” are better thought of as unique features that distinguish sustainable investing from conventional approaches.
ESG describes the underlying factors that sustainable investors believe must be considered in any complete investment analysis; or put another way, the indicators of what makes an investment sustainable. The broader industry use of ESG as a neutral-sounding acronym perhaps reflects unease over using the other more values-laden terms. But it’s insider jargon that makes it harder to connect to investors who can relate to sustainability and impact but need to have ESG first defined for them and then explained to them.
Impact, on the other hand, clearly resonates with investors. But there is debate over how to define and measure impact. I don’t want to see impact used simply as a synonym with the other terms. If a fund claims it delivers impact alongside financial return, then it needs to demonstrate that to investors, a topic I’ll have more to say about in an upcoming post.
