The limited screening as conducted by the likes of MSCI is indeed unlikely to meet the increasingly stringent demands of European investors who currently invest in actively managed ESG funds.
Asset managers refuse to comment on their ETF pipeline but they would not be taking ESG investing seriously if they did not expand their offering to, for example, CO2, and sector-dedicated ETFs.
This, and more rigorous screening, are needed for the sector to establish itself.
Expansion plan
While passive solutions in the ESG space still have some strides to make, they have the wind in their sails. Van Mulligen, for example, no longer considers investing in passive vehicles that ignore ESG-criteria. “All new passive investments we make are ESG-screened,” he says. “In a year’s time, the percentage of ESG-dedicated investments will probably have risen from 60% to 70%. And the only reason growth is not faster is that our clients want to limit turnover in their portfolios.”
An important factor of passive ESG solutions is that active ethical funds suffer the same symptoms as their non-ethical equivalents: they tend to underperform.
The FO Ethical Equity sector, which comprises 77 funds, has underperformed the Global Equity fund sector over the past five years, despite having significant correlation to it. This contrasts with the SRI ETFs, which often outperform their plain vanilla peers.
Besides, there is a belief that the popularity of plain vanilla ETFs will enhance their chances to succeed. On top of that, sustainable investing is a rapidly growing market, says Andrew Gilbert, who is responsible for ESG investing at Parmenion, a discretionary fund manager recently acquired by Aberdeen Asset Management.
“Four hundred of the 2,800 IFAs we service now invest in ESG funds. And this is going up by 30 a quarter,” he says. “And a lot of those people will want a passive solution, too, as is the case for every asset class.”
Asset managers will undoubtedly play their part. As the market for ‘ordinary’ index trackers is becoming crowded and profit margins go down, they will be eager to graze in the pastures of green investing.
