Active is the Clear Choice for ESG Management
June 8, 2022
Professional investors trust active managers when it comes to investing for environmental, social and governance risks. That is the finding of a new report from Capital Group, titled ESG Investing 2022. The report surveyed 1,130 professional investors from around the world with more than $32 trillion combined under management and found that active is the clear choice for firms to reach their ESG goals.
ACTIVE LEADS THE WAY
The survey found that overall momentum for ESG investing is increasing across the board and that over three-quarters (77%) of respondents prefer active funds to integrate their ESG investments or prefer a hybrid strategy that includes active ETFs.
Active was strongly preferred for a manager’s ability to do “bottom-up security research and fundamental analysis” on the merits and risks of an ESG investment and to make critical investment decisions. ESG bonds were cited as particularly “complex and arduous” making the use of active managers imperative for ESG bond investments.
DATA UNCERTAINTY BOOSTS NEED FOR ACTIVE
In all regions and across industries, investors cited issues with inconsistent ESG rating systems, data and transparency as the top barriers to implementing ESG investments. The lack of a global standard for these metrics is one reason why professional investors are overwhelmingly turning to active strategies.
In fact, active managers are viewed as very important for their ability to sift through “inconsistent and inaccurate ESG scores.” After all, fundamental research and human analysis are needed to account for nuance and subjectivity and to reconcile those factors with constantly changing external concerns. The report says, “by using propriety research and rigorous security selection, active managers can bypass the problems created by superficial scoring systems and a lack of consistent and reliable data.” Appropriately interpreting this range of data is paramount to achieving success in ESG investing and active managers have the skills, tools and resources to make that happen.
RESEARCH IS ACTIVE
We all know that researching investments takes time and effort. And with the additional parameters and concerns surrounding ESG, it takes even more energy. The survey found that many institutional investors prefer using active managers to take on the complex and time-consuming research process to locate ESG investments. A deep-bench of analysts is necessary especially with “information overload from a rising tide of ESG data” and a “large universe of smaller and less-researched companies.”
Check out the full report to learn more about active and ESG investing as well as information on how the war in Ukraine is changing the ESG landscape, what investors think of greenwashing, why investors are turning to ESG and more.