There is also the argument that investing in ESG strategies using a passive instrument goes against what this type of investment approach stands for, which is active engagement in environmental and social issues.
Mr David explains: “For many ethical investors, ethical investment is about promoting positive change and a more active approach allows this through more robust voting and engagement.
“Active managers can sell a stock if their engagement is rebuffed; passive managers cannot.
“Even among ethical funds, approaches will vary, and positive and negative screens, and engagement policies will differ.”
He reiterates: “It’s important to understand what is being offered and that it is being delivered effectively.”
Hands off?
Amanda Tovey, expands on some of the constraints of passive ethical funds.
“A passive fund will most likely be rebalanced at regular intervals, for example quarterly, and constituents checked at the same time to make sure they still meet the fund’s criteria,” she explains.
“This means there is no active oversight in between, so if a company acts in a way that should exclude them from the fund it will then take some time for this exclusion to filter through.
“It will also most likely mean there is no manager who is actively engaged with the company and its management, discussing areas of concern such as social or environmental policies, lobbying for improvement in areas where it could do better and actively voting at AGMs.”
In comparison, Ms Tovey suggests active managers will be much more “involved in these areas”.
She suggests: “As with all funds there will be times when passives outperform and times when actives outperform.
“However, in this space we believe active management is particularly important to ensure fund managers are actively engaged with the companies they are invested in and to provide a positive investment overlay.”
But Ms Dreblow does not want it to become a case of active versus passive.
She acknowledges: “Unlike other investment markets, I am hopeful this will not become a battleground between passive and active strategies.
“My expectation is because SRI assets under management lag client interest so significantly, there is room for growth across all areas – particularly where materiality is a factor.”
eleanor.duncan@ft.com
