ESG feature – Passive investing & stewardship


Passive investing is evolving. It has had to. Regulators have made it clear that index investing and ETFs do not exempt institutional investors from their responsibilities as sharehold- ers. So, when it comes to stewardship, even passive investors have to be active.


The beneficiaries of this ruling are the environment and society. Billions of pounds have poured into environmental, social and governance (ESG)-led passive strategies this year as investors see that ESG considerations have never been more material to managing risk and long-term sustainable value creation.


Indeed, $32bn (£24.8bn) was invested in ESG-focused exchange-traded funds (ETFs) in the opening six months of the year, consultancy ETFGI says, more than three times the $9.8bn (£7.6bn) recorded in the first half of 2019. Meanwhile, $250bn (£194.3bn) flowed into sustainable index funds during the same period, according to Morningstar. From a sustainable point of view, this is good news as there is always an opportunity to advocate for more, whether that is higher governance standards, a more diverse management team or better climate management and disclosures. In indexing, the value of stewardship is clear. “Passive inves- tors need to be active because they are forced owners of compa- nies with significant ESG concerns,” says Ian Burger, head of corporate governance at Newton Investment Management. This point is echoed by Mette Charles, senior investment research consultant at Aon, who says that when it comes to ESG, even passive investors need to be “agents of change”. Yet this is easier said than done. Index managers are adopting some of the practices enjoyed by their active peers, but the influence they can exert over corporates is not as strong. “Given the weight of money that sits behind passive approaches, we need passive managers to be active to drive positive change. So, it has to happen,” says Tim Manuel, Aon’s UK head of responsible investment. “But we all acknowledge that some of the levers available to passive managers are limited.” These limited levers mean passive managers typically cannot sell a company that is not responding their concerns as a share- holder. It must continue holding the stock despite the fund’s ESG focus. There are index funds that do use divestment as part of their strategy, such as Nest, but this is the exception rather than the rule. “Many passive investors do not have the luxury of the ultimate sanction,” Burger says. “If a company has a significant ESG concern, active managers can sell it or avoid holding it in the first instance.” Marta Jankovic, a director in BlackRock’s Investment Steward- ship team, believes that index investors, precisely because they cannot sell, are uniquely positioned to advocate for business practices which are consistent with delivering long-term sus-


Issue 97 | October 2020 | portfolio institutional | 41


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52