More and more investors are adopting environmental, social and governance (ESG) principles, prompting active managers to strengthen their credibility on this front.
Actively managed funds are experiencing a kind of renaissance, and with the industry looking for new frontiers conducive to this management, environmental, social and governance (ESG) investment appears to be a viable option.
“The investment management industry is in the midst of fundamental change, as the growing acceptance of important environmental, social and governance (ESG) characteristics as a driver of long-term investment performance comes with investor demand that the social and environmental impact of a portfolio be considered alongside its return, ”according to Neuberger Berman. “Many investors now expect any robust investment process to incorporate important ESG considerations, and they are increasingly looking to define, measure and improve the total impact of their investments. “
Passive and active ESG investment
“Passive strategies are typically implemented using third-party ESG data that relies heavily on voluntary corporate disclosure, can be retrospective and of limited scope,” notes Berman. “The use of data can be valuable as a starting point, but limited in its absolute use. Due to the limitations of quality, disclosure and other inherent biases in ESG data today, investors who rely solely on data to make investment decisions are likely to miss a comprehensive risk-return analysis. . Multiple data sources can provide the flexibility of a broader analysis and the ability to focus on the issues most relevant and important to the investment thesis.
Regulators and lawmakers are starting to step up. The European Union will set performance thresholds from 2021. Minimum guarantees will allow investors and businesses to switch to a greener economy. Portfolio managers of ESG funds in Europe will need to explain how and to what extent companies are taking sustainable steps. Data confirms that getting active with ESG pays off.
“Over rolling one- and three-year periods since 1999, active ESG strategies have beaten their passive counterparts after fees more than 60% of the time, regardless of capitalization and geography. The success of active management has been particularly pronounced in global and non-US equity portfolios, as active management has outperformed passive management at least 70% of the time, ”notes Berman.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.