Reconciling responsible investing with passive management

On the 09/18/19 at 11:35AM

The growth in passive investing and the increasing integration of Environmental, Social and  governance (ESG) factors are two undeniable trends in the asset management industry. These trends appear to be mutually incompatible, but that is not the case, says Laurent Trottier, Global Head of   ETF, Indexing and Smart Beta Management at Amundi.

Amundi has built a solid and recognised ESG analysis process and embraced a leadership role in its  three-year plan, announced in October 2018. Mr. Trottier says there are three key aspects to onsider when thinking of ESG in a passive investing mode: core or “vanilla” products; ESG solutions offered by index and exchange-traded fund (ETF) providers; and bespoke solutions.

When it comes to core passive investing products, where portfolio managers buy every company in the benchmark, one could believe they have close to zero leeway to engage. One way that Amundi addresses this is to bring together passive and active funds when it talks to the companies whose shares it owns.

Engaging with companies

Funds managers are expected to regularly engage with companies in order to ensure that they are being run in such a way that shareholder returns are optimised. Mr. Trottier says it has been a very conscious decision for Amundi that all the index funds are included in the asset manager’s voting and engagement activity. “Having a dedicated team that votes for both our active and passive funds is a good first step to incorporating ESG into passive holdings, to offset our limited flexibility to sell out of stocks.”

He adds: “Passive assets are a very significant part of our total equity position, so including those assets in any engagement gives us greater weight in the conversation with management.”

Rising demand requires new solutions

In the past, “ESG was seen as something for philanthropists or as a philosophy of investing for people who wanted their investments to align with their values or beliefs. Today it is seen as an important way to hedge your risks, especially when it comes to climate change”. While there has been a long-running debate over whether ESG is a source of outperformance, “there is now a very good body of evidence that it helps company performance”, he adds.

The number of passive funds incorporating ESG is increasing, and banks and asset managers have created a wide range of solutions for investors of all stripes. Northern European markets were the early adopters of such products, but now Amundi is having many conversations in Asia, since Japan’s US$1.5 trillion Government Pension Investment Fund (GPIF), the world’s largest pension fund, created an index to try to improve the governance of companies it invests in. “This type of thing normally starts with large institutions, then filters down to public investors. Moves like GPIF’s act as a catalyst,” Mr. Trottier says.

Reconciling responsible investing with indexing

Three years ago, Amundi launched a range of low-carbon solutions for people who want to decarbonise or lower the carbon footprint of their portfolios.

In addition, Amundi has long excluded companies that are involved in making cluster bombs, which violate international and European treaties, for all its ETFs and open-ended index funds.

If clients want to go further when combining responsible investing and passive strategies, the next option is to look at investing in Socially Responsible Investing (SRI) indexes. Initially, discussions on ESG were focused on the equity side, now they are very much part of the conversation in fixed income, as well. Amundi has launched a range of equity and fixed income ETFs and index funds that track MSCI SRI indexes: “With these products, we provide exposure to responsible benchmarks with low tracking error. It’s an example of how easy it is to incorporate ESG into passive investment products. We also have a full range of ESG-tilted products and thematic funds that investors can opt for,” Mr. Trottier says.

Amundi infographie

Building tailor-made ESG index solutions

The final option is the creation of bespoke solutions. “Two-thirds of the RFPs [request for proposals] that we answer on the passive equity side incorporate responsible criteria,” he points out. “This is often in the form of a list of companies to be excluded following a client’s own ESG analysis.”

“They give us a list of exclusions and our job is to reduce the tracking error created by those exclusions – or they can just say they don’t want to invest for instance in companies that earn more than 5% of their revenues from coal, pornography, alcohol, etc, and our team screens the investment universe to determine which stocks should be excluded to respect the wishes of the client, with again low tracking error target,” says Mr. Trottier.

Some clients ask the team to slightly tilt or improve the profile of a portfolio. “They might give us a 50 bps tracking error budget and say, ‘How much can you reduce our carbon footprint or improve our rating on employee retention?’ It can be any type of ESG criteria, as long as we have the data and the ratings,” he says.

When creating bespoke passive solutions incorporating ESG issues, Amundi has an advantage because both passive investing and ESG are core components of its corporate DNA, Mr. Trottier says. “It’s clearly a plus to be the largest asset manager in Europe when it comes to access to data. Our duty is to be clear about what we are talking about and what is being measured when using data.”

“We want these ESG solutions to be universal, and to do that, you have to be able to talk the same language all over the world,” says Mr. Trottier. “The SDGs [Sustainable Development Goals] provide a useful framework for those discussions.”

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Written by Mike Scott for Bloomberg Media Studios. Originally published on


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