Client-Centric ESG Investing Needs to Be Active, White Paper Asserts – Financial Advisor

According to the AMC’s most recent white paper, “Sustainable Investing is an Active Process,” advisors who want to deliver client-centered ESG to investors “inherently” need to use active management, writes Financial Advisor.

The traditional fully-active approach allows for a more nuanced consideration of quantitative and qualitative factors, which helps investors tailor their portfolios to their sustainability goals.

“Passive funds tend to use the flavors offered by MSCI’s ESG indexes and rely heavily on ESG ratings from providers such as Facebook, Apple, and the Google unit of Alphabet, which rate megacap companies higher because smaller companies lack the resources to create the reams of disclosures rating companies require. That leaves quality, sustainable companies out of indices and ripe for active manager picking,” according to Financial Advisor.

“The reality is that passive management is a very blunt instrument when it comes to ESG. They can do a lot of top down analysis, but it is very difficult for them to engage with the 2,000 companies that make up their indices. We have teams of analysts that do that all day. As a result, we believe that active ESG management is the best way for advisors to future-proof their fiduciary responsibility to their clients,” said Vish Hindocha, director of investment solutions for MFS and AMC member”

SEC chair warns of risks tied to ESG ratings – Financial Times

In late May, Jay Clayton, Chairman of the Securities and Exchange Commission warned investors about the risks of relying on simplified ESG ratings. He cautioned that any analysis ‘that combined separate environmental, social and governance metrics into a single ESG rating would be “imprecise”.

The Financial Times cited Tesla as an example of such simplification. The FT wrote, “the concerns expressed by Mr. Clayton over combining E, S and G scores have previously been described as ‘aggregate confusion’ by academics.” One example the FT and many others have cited is the electric car maker Tesla. The business, which scores highly on environmental metrics, has often been criticized for its record on workers’ rights. As a result, different ratings providers give it wildly different scores.”

While funds are flowing into ESG – in 2020, investors poured $20.6 billion into US sustainable funds - some industry professionals urge investors to be cautious.

John Hale, global head of sustainability research at Morningstar said, “Funds labelled as ESG could disappoint investors, not because of investment returns but because they fall short on demonstrating their social and environmental impacts.”

Natixis survey: Professional investors expect to grow AUM over next year – Investment Week

The latest investment managers survey from Natixis shows that worldwide, despite COVID-19 headwinds, financial professionals expect to grow their assets under management by an average of 2.5% over the next year. That’s good news for RIAs, FPs, and independent broker/dealers.

According to the survey, investment professionals see the value in active investment strategies. Seventy nine percent of respondents believe actively-managed funds are favorable over passives given market volatility, with an average of 69% of client assets held in active investments. In particular, some 69% believe active funds are well-suited to small-cap equities and emerging market equities, while approximately half of those surveyed believe active portfolios are best for investing in fixed income.

Dave Goodsell, executive director of Natixis' Centre for Investor Insight, said: "What we continue to see globally is still the desire for active management combined with an increased use of alternative strategies to help clients navigate these uncertain markets."

Also worth noting is investment professionals’ reliance on and interest in ESG. ESG it seems has been growing in importance. Investment Week writes that, “looking back over the previous 12 months, almost a third (29%) of survey participants saw an uptick in demand for ESG from clients.”

Darren Pilbeam, managing director, UK retail and wholesale sales at Natixis Investment Managers notes the “importance of ESG-related strategies which have become much more visible in the COVID-19 world.”