ESG Investing  

What to look for in passive ESG investments

  • Identify the advantages of ESG investing through passives
  • Explain the potential longevity of ESG investing
  • Explain what stewardship means
CPD
Approx.30min

Shareholder influence can come in a number of forms, from direct lobbying to proxy voting.

Increasingly, investors want to be reassured that when it comes to the big challenges, such as reducing carbon emissions, their asset manager is part of the solution and not part of the problem.

This is creating greater focus on asset managers and their stewardship practices.

The rise of stewardship

Stewardship is relatively new to passive investing. In active investment circles, stewardship has always sat naturally beside active stock selection as a way for portfolio managers to add value.

In the passive world, however, where the tradition is hands off, minimal cost tracking of indexes, the role of stewardship has been less obvious. But that has changed as passive investing has become a much larger part of the investment industry, and as issues around socially responsible investing have come
to the fore.

Today, the most established providers of ETFs actively engage in stewardship, and there is evidence that institutional investors increasingly look at stewardship practices when selecting which products to invest in.

For example, last year DWS commissioned a study 1 by CREATE-Research into how pension funds view stewardship.

CREATE-Research surveyed 127 pension funds in 20 different markets, asking them a range of questions around passive investing and stewardship. Among other notable conclusions, the research found that:

  • The structural rise of passive investing has aroused interest in stewardship, with 60 per cent of respondents regarding it as ‘very important’ and 38 per cent as ‘important’.
  • Over 84 per cent of respondents cited various stewardship practices as pivotal in improving the quality of ‘beta’ (the market return) while generating positive societal spin-offs.
  • A manager’s track record on stewardship was cited as a criterion to a ‘large extent’ in manager selection by 56 per cent of respondents.
  • Stewardship will become a key point of competition for index managers as competitive pressures have already driven down fees.
  • 80 per cent of respondents expect stewardship demands on their index managers to increase while emphasizing the importance of direct engagement as well as proxy voting.

Although the report covered pension fund investors, the same drivers – investors demanding socially responsible investments, fee compression requiring ETF providers to seek new ways to differentiate their services, etc – are present in the high-net worth and retail investor market.

In future, investment advisers are likely to increasingly be asked to look at stewardship as a way to differentiate ETF providers.

Differentiation

With institutional investors increasingly looking at stewardship – and also, if they are not doing so already, retail and high-net worth investors – as a way to compare one ETF provider with another, it is useful to look at the elements those investors might take into account when allocating money.

A number of research organisations have started to formally analyse how big assets managers proxy vote on ESG-specific shareholder resolutions on topics such as climate change, diversity, human rights and so on.

A recent example is Morningstar, which put out a report in February which analysed the proxy voting activities of 50 of the largest asset managers active in the US (including European asset managers active there).

Morningstar found that asset manager proxy voting support for ESG-related shareholder resolutions has increased considerably over the last five years, with average support across 50 large fund families moving to 46 per cent from 27 per cent.

However, the researchers also found that five of the 10 largest fund families in the US voted against more than 80 per cent of ESG-related shareholder resolutions.

CPD
Approx.30min

Questions appear on the last page of this article.