Does investing responsibly have to be an active strategy? Can you invest responsibly passively? Jones: That follows on naturally from the conversation about ESG scores. We have clients who will invest in indices that use ESG scores in their construction, but that is a minority approach among our clients. We are not comfortable with the scores being the basis on which to make investment decisions to construct a portfolio. We are more comfortable using some metrics, such as carbon emissions where the data is better, to tilt portfolios. For the other ESG factors, we feel more comfortable focusing on stewardship. For a passive approach we emphasise the qual- ity of stewardship undertaken by the investment manager. For me, investing responsibly from an index-tracking perspec- tive, the focus should be more on stewardship. To be able to consider the ESG characteristics of companies, you need more of an actively managed approach. Logan: Looking at this from a slightly different angle, to be a responsible investor, we need to invest cost effectively for our clients to deliver on our fiduciary duty. Passive has an impor- tant role to play here. The engagement part needs to be well


18 October 2022 portfolio institutional roundtable: Responsible investing


resourced, and it is probably why you see passive focused on a few large managers. They can charge low fees, but still have a sizable team to do that engagement.


There is this interesting angle that part of being a responsible investor is recognising that we are delivering net of fee returns as well as making an impact. Gopinathan: Stewardship and its application to passive ETFs, which are cost-effective vehicles, is a structural challenge. The industry needs to think about this a lot more. ETFs have been sold as a low single-digit bps fee investment for cheap exposure to the equity market. Stewardship by defini- tion is labor and time intensive. For a 1,000-company passive ETF to go in and steward the portfolio correctly is not a low- cost exercise. So while passive ETFs may play an important role in delivering fiduciary duty, whether that still means responsi- ble investing in its traditional sense is still an open question. Campbell: In developed markets we are hiring an active team, but we will still have some passive allocation. We felt that we do not have full confidence in the ESG data, but we have confidence in the E element. A lot of it was backward looking on climate, so we will build a forward-looking element.


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