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How Passive Funds are Playing an Active Role in ESG

Mark Zinkula, chief executive of Legal & General Investment Management, says passive funds can engage with companies and improve their stewardship

David Brenchley 2 May, 2018 | 2:49PM

Wind Farm - Ethical Investing

Two of the fastest-growing areas of investment in recent times have been passive funds and socially responsible investing. But investors could be forgiven for thinking the two were incompatible.

That’s certainly an argument put forward by active management advocates – that passives cannot influence corporates’ behaviour because they have to invest in index constituents no matter what.

But that doesn’t necessarily hold true, according to Mark Zinkula, chief executive of Legal & General Investment Management.

LGIM has run index-tracking fund mandates for a number of years, and has recently moved into the exchange traded fund space through the acquisition of ETF Securities’ platform Canvas.

Governance institute ICSA named LGIM as the most effective asset manager at engaging with company management and helping them generate more value, an award it has won three years in a row. “That’s very clear evidence that passive managers take stewardship seriously and can absolutely have positive influence," Zinkula says.

He says a focus on stewardship by asset owners is “critically important” and the fact that more asset managers are “making noise on this topic” is a “fantastic development”.

“We engage extensively with companies; it isn’t just about voting. Most companies are functioning just fine so it’s a question of which ones we think need more engagement on an issue or a range of issues.”

Zinkula says LGIM has an independent division which is focused on corporate governance that is “completely free of any business pressures”.

The chief executive does not think this increased governance focus will necessarily mean costs will be higher for investors in the future. He predicts ETF fees will continue to fall.

He notes that the larger passive asset managers, such as LGIM, Vanguard and BlackRock, will see an incremental cost increase by focusing more resources on their stewardship responsibilities. However, this can be offset by the advances in technology that enables them to automate more tasks across the businesses.

“It’s easier for us to absorb that cost and not have to pass it through,” he concludes.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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