Passive investors, active owners

Passive investors can’t be active owners? Nonsense. As ROBIN POWELL explains, a growing number of financial technology firms are helping investors who want to be both.

There are so many misconceptions about ESG, and one of the biggest is that investing with your conscience is somehow incompatible with investing in a passive, or systematic, way.

The impression that some fund managers like to give is that sustainable investors have to use an active manager. It’s simply not true. You can invest sustainably and avoid the usual drawbacks of active management, including higher costs and unpredictable performance.

Indeed, there’s a whole range of alternative options to choose from. First, for example, you can buy an ESG fund with a negative screen — in other words, a fund that invests in broad market index but screens out stocks with the lowest ESG scores. Secondly, you can use a broadly passive fund with a positive filter — that is, a fund that gives you greater exposure to stocks with the highest ESG scores. Or, if you prefer, you can choose a fund that uses both of those approaches.

Passive investors CAN be active owners

Another factor to consider for those who wish to combine ESG with a systematic approach is corporate governance. Again, there’s plenty of misinformation on this subject. Some will tell you, for example, that passive fund managers don’t care about governance. The evidence suggests that, on the contrary. the rise of indexing has been good for governance and that passive managers actually have a better record than their active counterparts when it comes to being active owners and holding company boards to account on social and environmental issues.

Another misconception is that retail and institutional investors have no influence over governance, and no formal way to express their opinions on matters relating to ESG. There are, in fact, a number of financial technology companies that can help investors to be genuinely active owners of the companies they’re investing in.

One of those firms is Minerva Analytics, which specialises in proxy voting. I’ve been interviewing Minerva’s Paul Hewitt for the latest episode of The GSI Podcast. We discussed the growth of active ownership and how firms like Minerva are giving investors the chance to influence corporate behaviour in a positive way.

ABOUT GSI

GSI stands for Global Systematic Investors. The company’s mission is to provide a successful long-term investment experience, whilst allocating more to companies with a sustainable vision. To find out more, just visit the website, https://gsillp.com/.

You can access a full transcript of Robin’s interview with Paul Hewitt here.