ESG Unlocked: Europe out in front - Page 8


Stuart Kirk : ETFs have more ‘ legitimate role ’ than active funds on ESG

ETF investors have a say in more boardrooms than your average active manager
Author : Theo Andrew

ETF investors have a more “ legitimate role to play ” when it comes to ESG investing compared to their active counterparts , HSBC Asset Management ’ s former global head of sustainability Stuart Kirk has said .

Speaking at ETF Stream ’ s ESG ETFs Investor Workshop last week , Kirk said passive investors have “ more skin in the game ” because they own substantially more companies than mutual funds .
While active funds often claim to engage more with the companies they own , Kirk argued that by excluding so many holdings , they are merely passing the problem onto somebody else .
“ Passives and ETF investors have more skin in the game because they own more companies ,” he said .
“ They have more say in more boardrooms than the focused manager . They have a bigger and more legitimate role to play because they have a seat at the table . The average number of holdings in an ESG ETF is about 1,300 stocks , the average number of holdings in an active fund is 20 to 50 , they have excluded so many stocks .
“ The right way to have an impact , counterintuitively , is to have a broad portfolio because you have no more effect on prices than a concentrated one , you have a morally stronger position and you have more skin in the game .”
Kirk highlighted the importance of engagement and said passive managers must vote their shares to have any real impact , an often-contested area in the passive space .
Last month , he slammed asset managers for divesting , just days after his former employer announced a plan to divest from its thermal coal holdings by 2040 , labelling it “ worse than pointless virtue signalling , and potentially harmful to the environment ”.
Despite this , he said the ability of an active manager to participate in IPOs was where they could make a difference , albeit a small one . “ The number of IPOs in the S & P 500 relative to the whole S & P 500 is less than 0.5 %.”
Fundamentals drive shares prices , not ETFs
Kirk , who resigned from HSBC AM in July , also rallied against the theory that the growing size of the ETF market is helping to distort prices , adding it is the secondary market – such as venture capital and private equity – that makes a difference , not the primary markets .
“ No amount of inflows and outflows of ETFs or passives affect the price of underlying securities . It is the fundamental cash flow and the outlook of companies decided by active managers that determines the price ,” he said .
“ By definition , for every seller there is a buyer and for every buyer there is a seller . It does not matter for the company one bit .”
He added this causes a problem when groups such as the Net Zero Asset Management Alliance ask for alignment because somebody always must own the poorly rated companies .
“ We cannot all be aligned because the amount of money in poor companies stays the same ,” he continued . “ It is immoral because you are forcing the bad companies that you do not want to own onto somebody else .”
Furthermore , Kirk said he believes the industry needs to be more specific when talking about ESG , which is
8 ESG Unlocked : Europe out in Front October 2022