Climate Finance | July 29, 2020

Active fund managers fret as investors pour money into “passive” ESG funds

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha, July 29 – Net inflows to low-cost, passively managed environmental, social, and governance funds totaled $12.7 billion in 2019, compared to $8.7 billion for their actively managed counterparts. What’s more, passive ESG funds analyzed by Morningstar outperformed active ESG funds in 2019 and the first quarter of 2020. 

“The advent of passive ESG funds provides more options to investors seeking sustainable impact, and we encourage these fund managers to make commitments to comprehensive ESG approaches,” said Meg Voorhes of US SIF, which compiled the stats in its new report, The Rise of ESG in Passive Investing.

Climate benchmarks

The European Union is developing two benchmarks that dovetail with EU decarbonization goals (the Climate Transition Benchmark) and emissions reductions aligned with the Paris agreement (the Paris-Aligned Benchmark). Switzerland’s Qontigo has launched the first indexes based on the benchmarks. 

Hiro’s Journey: Japan’s pension fund chief rallies ‘universal owners’ around sustainable finance

Active Stewardship

Engagement with company management is one of the few ways passive ESG funds can distinguish themselves. Among the best practices for passive ESG funds identified by US SIF are  clear ESG disclosure, aligned proxy voting, impact measurement and reporting, and company engagement. “Passive fund managers can also communicate with companies to improve their ESG policies and practices through in-person meetings, phone conversations or letter writing/email campaigns,” says the report.  

Tilting the index

As large “universal” asset owners push for sustainable alternatives, asset managers are tweaking the indexes that underlie their passive funds. BlackRock’s Larry Fink has promised to offer sustainable versions of its flagship indexes and shift from a traditional market cap weighting to ones tilted towards ESG factors.

With indexes and stewardship, BlackRock pledges to retool passive investing for climate action