There are good business reasons for the surge in fund re-brandings as ESG products, but there are also risks

NEW YORK, April 28, 2020 /PRNewswire/ -- A clear sign of the growing popularity of sustainable investing, including ESG integration, is the number of new mutual funds and exchange-traded funds of this type coming on the U.S. market. In 2019 sustainable funds and related share classes grew by 2,180 to end the year at 3,460. During the first 3 months of 2020 another 777 funds/share classes were brought to the market, according to Sustainable Research & Analysis ("SRA"), an independent source for sustainable investment management information, research, opinions and sustainable fund ratings.  

Steve Schoepke, Director of Portfolio Analysis at SRA, states that the majority of these new offerings are the product of rebranding or "repurposing" of existing funds to reflect ESG objectives. This is formally implemented by amending fund prospectuses or similar offering documents to reflect the formal adoption of sustainable investing practices—most often these are in the form of ESG integration. He goes on to state that rebranding a fund may involve a range of investment strategy and policy changes. These may be very minor adjustments to a fund's investment selection screens, or involve adding more complex ESG-integration analytical tools and processes. 

Fund rebranding has its trade-offs according to Schoepke. On the plus-side, rebranding to establish a sustainable investment fund is a relatively low cost and quick means for a fund manager to attain product scale. After all, the shareholder base for the rebranded fund already exists. For some shareholders holding funds for non-retirement purposes, rebranding is an opportunity to move to a sustainable product while avoiding certain tax implications. 

A minus is that managers using rebranding to introduce sustainable investment funds must still establish market credibility, especially if it is their first offering in the sustainable space. This takes time, and in the interim they may experience difficulties reconciling a fund's pre- and post- rebranding performance records.  

A bigger challenge is the risk to a manager's reputation if they are accused of "greenwashing." This is when an investment manager is seen as misleading investors into believing that a rebranded fund is managed in the interest of shareholder's values-based considerations, when it is not. A manager implementing only cursory changes to their investment process when rebranding is especially exposed to being characterized as greenwashing. Such reputational risk may ultimately stain not only an individual fund, but the "image" of the management company, overall – a serious "black mark" in a business relying on investor trust. 

Notwithstanding these negatives, Schoepke expects rebranding to continue as a principle method employed by fund managers to enter the marketplace. However, he believes that as the sector matures rebranding initiatives will increasingly emphasize a manager's in-house sustainable investment expertise and uniqueness.

SRA provides more insight into rebranding and other avenues for funds entering this marketplace in a report published on April 14^th. The report, entitled "Methods for Building Sustainable Investment Management Expertise," is available at https://www.sustainableinvest.com/methods-for-building-sustainable-investment-management-expertise/. 

SOURCE Sustainable Research and Analysis