October 05, 2017

Passive Aggressive: Is ESG integration into passive becoming the new norm?

The world of index-based investing is in flux as ESG integration into passive is on course to become the norm for new mandates. In the last year there has been a quiet revolution taking place as asset owners have been moving to integrate ESG into index designs for new mandates on core passive portfolios.

Integrating sustainability into investment strategies was a “minority sport” when David Harris joined FTSE 15 years ago. “Over this period, we’ve seen a dramatic change,” said Harris, who is now Group Head of Sustainable Business, London Stock Exchange Group, and Head of Sustainable Investment at FTSE Russell.

“For many years all the action on ESG integration has been in active asset management, whilst for passive, the focus has been limited to engagement and voting – in the last year that has all changed – for new mandates integrating climate and sustainability parameters into index design is being applied at scale and to core portfolios,” said Harris.

The rise in the use of “smart beta” has been central to enabling an investment approach to ESG and has also bridged the divide between active and passive investing. “Using a smart beta approach enables passive managers to integrate a range of different factors into the design of an index,” noted Harris. “Once an asset owner decides that they will move away from a standard market benchmark and introduce other factors or design elements it’s an easy step to incorporate their investment beliefs on ESG as part of this,” he said.