ESG Unlocked: Europe out in front - Page 7

seen as one of the most effective means of achieving goal-driven investing .
4 . Divestment is a useful tool
The ability of an ETF to divest in companies that do not meet its ESG criteria is not always a simple one and often requires frequent , or sometimes infrequent , index rebalancing to reflect its position , however , it is not always clear this is the right course of action anyway .
Divestment is often hailed by active managers as the ultimate weapon in their artillery . The ability to threaten the management of a company to pull their investment , should , in theory , make them stand up and pay attention .
However , the major risk here is that private capital such as individual investors and hedge funds – which care less about the ESG outcomes of the company – will swoop in to fill the gap . Not only does this lead to less insight and transparency but is potentially harmful to the environment , according to Kirk . Fixed income ETFs can also play an important role here . Denying a company funding , as opposed to shifting it to somebody else as in the equity space , is also a powerful tool .
5 . ETF investors are short-term in nature
Investors that only use ETFs as a strategic asset allocation tool do not hold the strategy long enough to affect any sort of change .
This is a problem when practicing ESG investing , or so the argument goes , as the money does not stick around for long enough to have any real impact .
However , a recent deep dive into flows shows the opposite to be true . In Q2 alone , ESG ETFs saw € 6.7bn inflows – 42 % of total flows into European-listed ETFs – according to data from Morningstar , despite the underperformance during the first six months of the year .
Highlighting how ETF investors are willing to ride out poor performance to meet their values .
ESG Unlocked : Europe out in Front October 2022 7