Passive Fund Providers Taking an Active Interest in ESG

Institutional investors are increasingly aware of the positive impact of ESG integration and active ownership practices

Hortense Bioy, CFA 10 August, 2017 | 12:04PM

Passive managers are no longer treating stewardship responsibilities as a “box-ticking” exercise, but are actively looking to influence investee companies and improve ESG standards across the board. They vote and engage directly with companies on prominent issues like executive pay, board diversity and climate change.

The seemingly unstoppable rise of passive investing has been raising questions about the implications for capital allocation and corporate governance. Critics say that by owning every company in an index, passive investors don’t care if company A does better than company B, or whether sector C does better than sector D. This lack of discrimination could lead to inefficient capital allocation, with money flowing into companies that don’t deserve it.

One way of mitigating some of that risk is for investors to make sure that passive-centric asset managing firms adequately monitor the companies they hold on their behalf. The good news is that this is exactly what some of the largest groups are now committed to doing.

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About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive funds and sustainability research in Europe for Morningstar

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