“Within the thematic ETFs, we also have concerns over the limited size and number of company holdings within some of these products. It’s a case of knowing exactly what you are buying.”
Doing due diligence
For some, active stockpicking is a core part of the approach to investing sustainably and responsibly.
Amanda Young, head of responsible investing at Aberdeen Standard, warns that investing passively without the ability to actively select stocks could exclude large chunks of the universe.
“Passive ethical money faces greater volatility and will be very dependent on individual sector performance,” she notes.
“That said, there are a number of innovative products in the passive space, evolving to take into account ESG factors.
“For example, concerns about climate change resulted in the launch of the Legal and General Future World fund, a multi-factor global equities index fund that incorporates a climate ‘tilt’ to address the investment risks associated with climate change.”
But she points out there are no passive options for positive selection or impact investing so the passive approach does seem to be fairly prohibitive in the ethical space.
Mr Waite acknowledges there are ways to incorporate passives into an ethical or sustainable portfolio.
He suggests: “Many investors use a core satellite approach, whereby they construct an investment portfolio allocating to mainstream assets and supplement it by adding ethical passive products in specialist areas, such as clean energy or sustainability screened products.”
Although there is evidence of innovation from passive providers, Mr Osfield believes there are still too many limitations.
He argues: "Ethical passive investing without this investigative engagement requires a high standardised level of disclosure from companies, which is not readily available in certain places, particularly outside of developed market large-cap companies.
"Until the level of disclosure becomes more ubiquitous, passive index trackers are less likely to be effective at ethical and sustainable investing. Furthermore, investors should stop looking at ethical investing as a box-ticking exercise that can be achieved through a high-level screening, rather focus on investing in companies that are fully embracing sustainability at their core."