Passive vs Active
Coghlan discusses the difference between passive ESG funds, and actively managed ESG funds, and some of the advantages and disadvantages as he sees it.
“Compared to actively managed funds, which may own fewer companies, passive ESG investments tend to own a bigger portion of the market (more companies), which limits the level of involvement they may have with each one."
Active funds give investors more freedom to choose businesses that align with their ESG philosophies as opposed to those that simply don’t do harm to them.
Passive investment funds tend to exclude companies entirely to meet ESG requisites, rather than seeking businesses who are having a positive impact.
Active funds can drop companies that do not align with their philosophies, whose sustainability credentials are questionable, or whose practices begin to change.
In a passive, tracker fund, the end investor is unable to sell their position if a company refuses to meet the standards that ESG investment require.
That said, they can apply some degree of pressure, which could foster change in the long run.
Tim Morris, adviser at IFA firm Russell & Co also supports active funds when it comes to ESG.
He says: “Many different ESG strategies can work well as part of a balanced multi-asset portfolio.
"Generally, we think ESG needs to be active to be done properly. We think shareholder engagement and voting is a critical aspect of any ESG strategy.
"My preference is for impact or strategies targeting innovation and looking to disrupt markets as I believe this is the most aligned form of ESG.”
Anita Boniface is a freelance journalist
