Recently Morningstar reported that globally passively-managed assets that incorporate ESG criteria into their strategies had grown exponentially to almost $250 billion from almost nothing 15 years ago. Within the ETF industry the growth has accelerated exponentially this year, with over $23 billion invested in European ESG ETFs during the first nine months of the year… over three times the same period in 2019.
Can index really have impact?
As an investor, is it really possible to integrate ESG considerations into an index strategy? Or is it necessary to take an actively-managed approach? There are arguments for both sides of the story. Our view is that there is a role for both active and index managed strategies in an ESG portfolio.
With over $11.5 trillion1 of assets tracking indices globally, it would be remiss to ignore the potential impact of those assets shifting to incorporate ESG criteria. We believe that index management can facilitate more widespread adoption of ESG investing. But still we hear the argument that index and ESG are incompatible. Let’s take a look at why we disagree by debunking some myths about the topic:
1) ESG investing is values-based, individual values cannot be reflected in an index
One size does not fit all when it comes to ESG investing; risk tolerance, regulation, personal beliefs, performance objectives all play a role in determining the appropriate ESG allocation. However, with over 1,000 ESG indices available covering everything from broad market exposures with light ESG exclusions to climate-aligned investments, investors have a myriad of choices when it comes to building a portfolio that meets their objectives. To make it easier to navigate, the Amundi Responsible Investment range is structured by levels of ESG integration, from Universal through Leaders to Socially Responsible Investment (SRI) and Climate – on a spectrum from “light green” to “dark green”.
The ability to incorporate more advanced sustainability goals is a result of constant improvements in ESG data. This means it is possible to develop indices aligned to specific UN Sustainable Development Goals (SDGs) or targeting specific greenhouse gas reductions. In fact, most active managers use the same data as the basis for developing and managing their active ESG strategies as the largest suppliers of ESG data are the index providers themselves.
2) Index investing lacks impact
Index investors can be impactful by allocating assets to more sustainable strategies and using the full breadth of sustainable indices offered, While simple exclusions can help, a best-in-class index can reward companies that outperform their peers based on ESG criteria, thus encouraging continual improvement. This impact is amplified through taking an active approach. For example, Amundi walks the talk by developing robust shareholder voting and engagement policies.
If you wish to integrate ESG within your portfolio, index-managed solutions can be a cost-efficient, transparent and impactful way to deliver on responsible investment goals.
3) ESG investing can damage your performance
This argument is one that we used to hear a lot. Investors do not want to sacrifice performance in adopting an ESG approach to investing. Today the data shows us otherwise. The chart below highlights analysis from MSCI, looking at the relative performance of ESG indices compared to the standard MSCI World. While the ESG Universal Select Index which we use at Amundi has shown consistently strong performance, the Leaders Index, with its best-in-class approach is impressive.
Source: MSCI, 31/08/2020
Responsible Investing at Amundi ETF, Indexing and Smart Beta
Amundi was established in 2010 with responsibility as a core belief and was one of the founding signatories of the UN Principles for Responsible Investment2 - and has recently been awarded an A+ across all categories in the PRI3 assessment. Amundi offers a broad range of ESG investment solutions and has an extensive engagement and voting policy, applied equally across both active and index.
The issuer of this document is Amundi. All currency stated is in USD.
This document is not intended as an offer or solicitation with respect to the purchase or sale of securities, including shares or units of funds. All views expressed and/or reference to companies cannot be construed as a recommendation by Amundi. Opinions and estimates may be changed without notice. To the extent permitted by applicable law, rules, codes and guidelines, Amundi and its related entities accept no liability whatsoever whether direct or indirect that may arise from the use of information contained in this document.
This document is for distribution solely to persons permitted to receive it and to persons in jurisdictions who may receive it without breaching applicable legal or regulatory requirements. This document and mentioned website has not been reviewed by the Securities and Futures Commission of Hong Kong. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
This document is prepared for information only and does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Any person considering an investment should seek independent advice on the suitability or otherwise of the particular investment. Investors should not only base on this document alone to make investment decisions. Investment in a Fund must only be made on the basis of the Key Investor Information Document (“KIID”) and its prospectus, which include information on the investment risks, and are available in English upon request or on amundietf.com. Transaction costs may occur when trading ETFs.
Investment involves risk. The past performance information of the market, manager and investments and any forecasts on the economy, stock market, bond market or the economic trends of the markets are not indicative of future performance. Investment returns not denominated in HKD, SGD or USD are exposed to exchange rate fluctuations. The value of an investment may go down or up.
This document is not intended for citizens or residents of the United States of America or to any «U.S. Person» , as this term is defined in SEC Regulation S under the U.S. Securities Act of 1933.
The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.mscibarra.com).
1 Source: Morningstar data compiled by Investment Company Institute, 31/11/19
2 The PRI was founded in 2005 with Credit Agricole Asset Management as a founding signatory. Amundi was borne of the merger of Credit Agricole Asset Management with Société Générale Asset Management in 2010.
3 For more information visit unpri.org and view the 2020 transparency reports.