Ashley Fagan is global head of ETF, indexing & smart beta strategic clients & UK/Ireland strategy & distribution at Amundi
We are witnessing a surge in environmental, social and governance (ESG) investment across the investment industry, from index management to active and beyond. With €42bn (£37.4bn) of inflows in 2020 versus €17bn (£15.1bn) in 2019, the ESG European ETF market continues its fast pace of growth. Total ESG ETF assets under management are now close to €82bn (£73bn) in Europe, growing by more than 135% in 2020.
Implementing ESG in index strategies
A passive investor has two axes through which to integrate ESG values in their investment strategy. The first is the investment itself – using the full spectrum of sustainable indices to find one that aligns with the investor’s values and investment objectives. This could be a simple exclusionary approach removing a specific exposure or a more stringent best-in-class index. However, by stopping with this first axis, investors could be missing an opportunity to increase their impact; it is by digging deeper that they can fully integrate their values – using the axis of engagement.
But for most ETF investors conducting due diligence the primary focus is index selection followed by the choice of a fund. Ensuring the index is aligned with the investor objectives is very important. And checking that the product tracks the index consistently is essential, as is finding a fund at the right price. But what about the ETF provider, why does that matter?
Aligning your voice
The assets invested through index-tracking vehicles qualify for the same shareholder rights as actively managed holdings. Using those rights is a valuable way for asset managers to drive sustainable change and to ensure that investor objectives are met. For example, an investor may choose a climate index-tracking ETF because they believe in the importance of meeting the goals of the Paris agreement. But what if the ETF provider they had selected was using their shareholder rights to vote against climate resolutions. Would that be aligned with the investor’s values and objectives?
Looking beneath the surface
With most ETF providers now offering ESG solutions, it is important to look beyond the marketing and examine what lies beneath to ensure investors achieve the maximum impact with their ESG allocation. For example, what are the asset managers voting and engagement policies? Do their voting records match their rhetoric… and investors’ core values? Most managers now publish their policies and report transparently on their web- sites, but a third-party perspective is also valuable. One organisation that reports on the voting activity of the largest asset managers is ShareAction, its Voting Matters 2020 report looks specifically at the climate and social impact voting activity of 60 leading asset managers.
When it comes to the largest ETF issuers in Europe, we note a real disparity in the approach to voting on climate and social issues (shown in the chart), underscoring the need for investors to ensure that the ETF they are buying is managed in a way that supports the overall investment objective.
Any experienced index manager should be able to track an ESG index, but a credible leader in ESG indexing will be able to go a step further and demonstrate the impact of their engagement and voting. Amundi has a comprehensive approach to shareholder advocacy, extending across index and active investments and we are proud to have a strong and credible voting record.
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