Third-party funds and exclusions
A challenge we've faced with investing in third party funds is finding a fund that completely matches our exclusion definitions while investing in companies that are creating impact.
For example, we recently expanded our exclusions to include fossil fuel producers. This includes oil & gas, along with thermal coal. In contrast, our third-party fund excludes only thermal coal.
We recently discovered the third-party fund had invested in a green bond issued by a gas company with its proceeds being used to support new solar projects. Exclusions can be a blunt tool and even though we'd ordinarily exclude this company, this type of investment aligns to impact as it helps the energy company transition to a low carbon economy.
Even when our exclusions align, if the third-party uses a different research provider to monitor and identify companies to exclude, the excluded companies won’t always match ours.
For example, we recently found another green bond issued by a company that our research provider deemed as non-compliant with our global standards screen (which is largely influenced by the United Nations' Global Compact Principles). The third-party fund we invest in has a similar screen for ESG controversies, using a different research provider. The definition differences between screens means our Fund invests in a company we would have ordinarily excluded.
While we would have excluded this investment, our Fund’s investment is enabling environmental improvements. The proceeds of this green bond are being used to transition offices and data centers into green buildings.
We think these are great examples of how tricky it is to get things right when picking impact investments, how subjective responsible investing can be, and how opinions of research providers can conflict. From time-to-time these differences will pop up, and while we can share why they are on our exclusion list, we are unable to instruct our manager to divest at this time.