ESG Investing: A dangerous placebo?
It’s been a difficult couple of weeks for the world of ESG.
First, an essay by Tariq Fancy, ex-CIO Sustainable Investing at BlackRock, lambasted his former employer and the broader ESG industrial complex for ‘simply making themselves (and investors) feel good while having little to no impact on the world’s climate crisis.’ Fancy – who described ESG as “a dangerous placebo” – was interviewed by the FT (subscription required) and his comments led to spirited debate (also in the FT) here and here . And if you have the time, his full essay is worth a read.
Separately, DWS Asset Management has been in the spotlight facing accusations from its former Group Sustainability Officer Desiree Fixler that it misrepresented its sustainability credentials. According to Investment Week, DWS denies the allegations. The FT reports that in light of the DWS debacle, “rival firms now fear that they could also come under scrutiny over claims of sustainability, which [are] hard to measure and [vary] greatly from one fund to the next.”
Still on the subject of greenwashing, a report by FT Adviser drew attention to recent actions by US and UK regulators in building momentum towards defining and enforcing the required standards for financial firms.
And finally, three recent reports – by EY, InfluenceMap and Reuters respectively – have all criticised asset management firms’ ESG disclosures, with many European firms scoring below average in a new study. You can read about the first two reports on Ignites Europe (subscription required) here and here.
D&I progress too slow, says new report
Over 40 per cent of large asset managers have failed to increase the proportion of women in senior leadership roles over the past three years, writes Chloe Leung of Ignites Europe. This chimes with the FCA’s Discussion Paper 21/2 published in July which was unequivocal in its message: diversity and inclusion improvements across the industry aren’t progressing quickly enough.
A report in Money Marketing broadens the D&I remit by reminding readers that “it’s no longer enough for firms to focus on driving improvements in just one, isolated area.” As a result, understanding intersectionality is key.
Industry players can expect to hear more from the regulator on its expectations in this area over the next 12 months.
Direct index investing: Dealmaking on the up
Investors are increasingly demanding customised equity portfolios that have traditionally been the preserve of wealthy clients, writes the FT (subscription required). One of the signs of this trend is the growth in dealmaking between some of the asset management industry’s biggest names and tech startups.
These tech firms are able to provide tailored portfolios that mimic an index, while including specific tilts such as ESG. Vanguard recently acquired Just Invest (FT: subscription required) – it’s first acquisition in 46 years – while according to Reuters, JP Morgan acquired OpenInvest, a US fintech startup.
Fund managers expect that this activity will mark the next stage in the democratisation of finance, and will probably put pressure on traditional products such as mutual funds and exchange traded products.
Who let the dogs out?!
Assets held in underperforming UK funds (aka ‘dog’ funds) are down by 35%, according to the latest Spot the Dog report by UK wealth manager Bestinvest.
The six-monthly study, which names and shames the worst performing equity funds, has identified 77 funds which meet the ‘dog’ fund criteria, down from the 119 funds identified six months ago.
It would appear that the FCA’s annual value assessments are helping firms up their game, though the relative performance of different investment strategies has also been a major factor.
Active ETFs: In vogue but not yet widespread
The FT (subscription required) reports on the rise in active ETFs. Capital Group is the latest big name to venture into the space. The firm is hoping to launch its new products in Q1 next year.
According to CFRA Research, active products represent roughly two per cent of US equity ETF assets, but have captured nine per cent of the inflows so far this year. Their popularity comes down to the fact that they can be traded throughout the day, which allows portfolio managers to take advantage of short-term shifts, and they tend to have lower expense ratios.
This activity is mainly happening in the US at the moment, but time will tell whether the trend will take off in other global markets. These two pieces, by Investopedia and Morningstar respectively, examine the pros and cons of Active ETFs.
Separately, BoardIQ (subscription required) highlights one consequence of the rapid increase in active ETFs. At JPMorgan, there are plans to consolidate the separate boards that oversee mutual funds and ETFs into one new mega-board. It will have 16 members and over $1 trillion in mutual fund and ETF assets.
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