Is ESG investing a form of active management?
ESG investing, by definition, is active investing, according to Simon Hallett, chair of the Active Managers Council research committee.
If investors want to put their money where they believe they are – and if advisers want to help them get there – asset management with a focus on environmental, social and government issues must be proactive, said Hallett, who is also vice-president. chairman and partner of Harding Loevner, an asset management company based in Bridgewater, NJ
“Passive management has a role to play in investing, but for ESG investments this role is very limited,” Hallett said in an interview. “A fully active approach to ESG investing allows for nuanced consideration of a wide range of quantitative and qualitative factors, which helps advisors tailor portfolios to their clients’ sustainability goals.
The Active Managers Council of the Investment Advisor Association is an education and advocacy group based in Washington, DC
Part of the need to use active investment management to help clients use their assets to strengthen their belief in ESG goals is created by the fact that ESG means very different things to different investors, said Hallett. Due to the wide range of definitions of ESG, some index funds labeled ESG have very little in common with each other.
“ESG is a collective name for a series of opportunities and risks,” Hallett said. “There is no way to access these opportunities and risks through passive, indexed investing. Active investing to achieve ESG objectives requires research on the part of the asset manager, advisor or investor.
Even something that appears to have a defined identity, like green funds, can cover a lot of territory. An investor might invest only in companies that have little or no carbon footprint or in carbon-producing companies that strive to limit emissions. Other investors might choose to invest in carbon-producing companies in order to have leverage to force companies to change their behavior, Hallett explained.
Active management is needed to achieve these different goals, he said.
“It’s up to the seller selling the investments to clarify for the advisor what a particular fund does, and then it’s up to the advisor to explain it to the investor,” Hallett added. “ESG investing is changing the world; how to change the world is the larger question to be answered by the investor. “
Maria Lernerman, ESG analyst at Harding Loevner, said in an interview that advisers who can add ESG offerings to their range of investment opportunities for clients add value to their financial planning.
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