Despite what detractors say, ETF firms can influence companies to align with sustainability principles
If the trends among institutional investors are any indication, the way forward for responsible investing is through engagement with portfolio companies. With that in mind, critics have argued that passive ETF providers are ineffective at advancing ESG goals, particularly given their hands-off approach to investing.
But according to Detlef Glow, head of EMEA Lipper research at Refinitiv, things just aren’t that simple.
In a piece published by ETF Stream, Glow took aim at the assertion that since index ETFs passively follow an index, providers have no choice but to allocate their capital among all constituents of their benchmark regardless of ESG profile.
“[T]he ETF issuer needs to ensure that the respective index is constructed based on the criteria he wants to represent in the ETF,” he said. “If the choices available do not meet the demand of an ETF issuer, they can also have indices created based on their own very specific criteria. These indices can be in-house solutions or indices based on the methodology of a given index provider.”
Another contention by critics, he noted, is that managers of passive products will not approach portfolio companies that need to do better on ESG. Since they do not have particular views on the companies held by their funds, the argument goes, they would not be able to engage with senior management of a particular company the way an active fund manager could.
“Nevertheless, even as the single manager may not contact the management of companies, the responsible member of the leadership team of the ETF issuer may do so,” Glow said.
Providers that want a voice at shareholder meetings, he added, may use voting pools or, in the case of issuers who belong to asset-management firms with active units, recruit colleagues from the active side to get their votes exercised.
However, Glow acknowledged that an ETF issuer’s ability to be part of the solution rather than the problem will depend largely on the strength of its conviction.
“So far, we see that some ETF issuers are pretty serious and highly engaged to deliver sustainable solutions to their investors, while others are striving for mediocre approaches that only deliver a limited value-add for investors who are looking for sustainable investment solutions,” he said.