Green Finance Advisor of Friends of the Earth (HK) / 香港地球之友綠色金融顧問
According to various reports, ESG equity funds, despite falling, have outperformed the peers. Specifically, majority of the sustainable index funds, whether in developed markets or in the emerging markets, have been holding up better than the traditional index funds, of which the prices declined even more. This could be contributed to the fact that many of these ESG funds has little or no investment to energy, airlines and resources companies, which are among the worst performers in the stock market since this pandemic outbreak.
While minimizing exposure to companies with high carbon footprint is important, there are a lot that investors can do in sustainable investing. Avoiding risks and getting positive financial return is certainly important. But investors who care about ESG and sustainability would also want to bring positive social and environmental impact through companies they invest. We doubt this purpose can be effectively achieved through the current approach of most indexed funds or passive funds. These funds could be doing performing fairly well by avoiding fossil fuels and other so-called sins stocks by adopting negative / exclusionary screening. However, how much time and resources they spent in understanding the sustainability strategies of companies and engaging with them on improving their ESG metrics is the question.
Some investors were not necessarily interested in companies’ business model and process but just wanted to check their internal framework to demonstrate that they had completed their due diligence. This approach is hard to result in positive changes for companies, environment or society. On the other hand, a more value adding, constructive approach, i.e. active engagement, is preferred for investors and companies to advance. Active engagement can help companies better manage ESG issues and understand both the risks and the opportunities arising from sustainability development. Investors can learn the issues that companies and their businesses encounter and solidify their confidence in the companies in which they invest. The mutual learning process should be on-going and fruitful, resulting in long-term value creation for both parties. How much effort is put to engaging companies for positive changes and opportunities exploration in ESG? This is a question that investment managers have to ask themselves.
Passive funds, particularly ETFs, are popular for compelling reasons. Low cost and tax efficiency are certainly major benefits for investors. Thanks to the development of passive funds and ETFs, the barrier for ESG investing is lower and more people and capital that care about social responsibility and sustainability can participate. Corporates seeing this rising trend will also be more aware of ESG and will take the issue more seriously which is also a force for good. But another reason for investors choosing passive investment is the disappointment in the historical performance of the traditional active funds. The up and rising demand for ESG and sustainable investing is providing the opportunities for active managers to shine again ── only for those who do not deny climate change and take the sustainability subject seriously.