Active management preferred for ESG allocations

The events in Russia and Ukraine offered a real time insight into the challenges facing ESG, ethical and sustainable investors around the world.

The events in Russia and Ukraine offered a real time insight into the challenges facing ESG, ethical and sustainable investors around the world. Whether you were a fiduciary investor like a pension fund, fund manager or individual investor, the binary nature of ESG scores and ratings made for some difficult conversations and investment decisions.

The result, according to $2.7 trillion global asset manager Capital Group’s 2022 ESG Global Study, was that some 63 per cent of all investors prefer to use active funds to integrate ESG rather than passive. The fact that Russian oil, gas and financial companies were rated among the leaders in their sectors offered an all-too-common reminder of this.

Equities remain the highest priority for apply ESG screens and integration, with 80 per cent of the 1,130 global institutions that responded to the survey agreeing. Spanning 19 individual markets around the world, Global Head of ESG Jessica Ground, said “ESG adoption rates appear to be firmly embedded among professional investors globally, with a growing preference for active managers to make the critical investment decisions”.

The true impact is that it “underscores the complexity of assessing ESG issues and that reducing them to a single ESG score cannot capture nuanced company evaluations”. Investors naturally turn to active managers for what is an inherently personal challenge and concept. The focus of investors around the world remains the need to appease or meet client expectations, with 27 per cent agreeing to this, whilst 23 per cent are making ESG decisions in an effort to make a positive impact.

Europe remains ahead of the curve on ESG, likely due to the Taxonomy legislation, with some 31 per cent of investors considering ESG to be “central” to their investment approach compared to 26 per cent around the world. Most interestingly, just 10 per cent of investors remain “on the sidelines” about ESG, falling from 16 per cent in the year before, suggesting those not embracing the approach may be left behind and struggle to meet customer expectations.