SECTION 1 : MYTH-BUSTING
Are passives the problem ? Five myth-busts on ESG and ETFs
Active managers do not have ownership over ESG . Developments in the index and ETF space are enabling investors to achieve their sustainable investment goals better than ever
Author : Theo Andrew
There is often much navelgazing from active managers over the passive approach to sustainable investing . While inevitably improvements can be made to the way both approach ESG – the plethora of incoming regulation and data issues means there is no perfect approach – the criticisms thrown at ETFs and passive investments are often overplayed and designed to keep vested interests front and centre .
With this in mind , ETF Stream thought it appropriate to set the record straight , busting five myths ( there are probably more ) often cast upon ETFs and ESG .
1 . ETFs cannot engage with their holdings
The argument passives do not engage with their underlying holdings is an argument that is often volleyed at ESG ETFs by proponents of active strategies .
While it is the case that passive strategies delegate the choice of ownership of securities to the index provider and , in most cases , are therefore unable to divest , this means there is an even greater onus on engagement .
Because index-tracking ESG ETFs are unable to divest from a particular company , they have an even greater responsibility than active managers to constantly engage with individual companies while holding index providers to the highest of standards .
As a result , asset management giants such as Amundi and Legal & General Investment Management ( LGIM ) are able to combine their active and passive assets and leverage their in-house teams to engage with the companies they own .
2 . Rules-based exclusions are an ETF ’ s only tool
Passive strategies are often called out for their rules-based exclusionary approach . However , this argument forgets that mutual funds – which often invest in much fewer stocks – exclude much more of the market .
This is important as it can be argued active funds are merely passing the problem of holding non-ESG assets to somebody else , creating a pot-kettle-black situation . As Stuart Kirk , former global head of sustainability at HSBC argued at ETF Stream ’ s ESG Investor Workshop event , ETFs have more “ skin in the game ” because they own more companies .
“ THE ACTIVE ETF SPACE IS A FAST-GROWING AREA OF THE MARKET , MANY OF WHICH HAVE ENGAGEMENT POLICIES IN PLACE , WHILE ALSO LEVERAGING THE EXPERTISE OF THEIR IN- HOUSE ANALYSTS ”
Furthermore , BlackRock ’ s decision to allow institutional investors the opportunity to vote directly with companies gives passive investors another string to their bow , through greater powers of engagement .
3 . ETFs cannot do impact investing
Impact investing is another concept that active funds claim to have ownership over .
While this kind of results-driven investing can often be hard to pin down , innovation in the ETF space is growing in this area too .
In September , index provider BITA and investing specialist iClima Earth partnered to develop five impact data , indices and analytics . For example , the Climate Change Adaption index will focus on solutions to help societies adapt to the consequences of rising global temperatures .
Another ETF designed to have an impact is the Rize Environmental Impact 100 UCITS ETF ( LIFE ) which launched in July 2021 , meaning ETF investors do have options if they are looking to make an impact . Furthermore , green bonds , which exist in both the passive and active space can be
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