Titel: Index investments and the integration of ESG
Forfatter: Matti Tammi
Udgivelse: 2017 – nr. 3
Antal sider: 5

Index strategies, whether segregrated mandates, mutual funds or exchange traded funds (ETFs), have become a cornerstone
of modern investment practice. Broadly diversified index portfolios are now accessible to most, if not all, types of investors
with less complexity and lower costs. Over the last few years, particularly since the increased availability of exchange-traded
funds (ETFs), the trend towards indexing has accelerated. A trend we think that is likely to continue given the persistence of
the underlying growth drivers and the expanding range of usages that investors find for ETFs.
This shift towards indexing coincides with a growing focus by investors on integrating environmental, social and governance
(ESG) aspects into their investment approach. There are two strands to that integration effort, engaging directly with companies
on ESG issues (investment stewardship), which covers the entire portfolio, and dedicated strategies that meet specific ESG
goals. On the face of it, index investing is challenged on both accounts. From an investment stewardship perspective,
index
investors are not in a position to sell holdings even if a company persistently fails to improve its record, while dedicated
index strategies often lead to higher tracking errors than many investors are able or willing to tolerate.
We believe, however, that by building on the long-term nature of the stakes they hold in companies, index investors can
actually be an effective change agent. We discuss some of the key aspects involved in fostering sustainable, long-term value
creation, using BlackRock’s engagement approach by way of example.
We further explore how risk-based ESG optimisation can offer an alternative for the growing number of index investors who
are looking to complement their mainstream portfolios with dedicated strategies. In particular, we find that it can help improve
a portfolio’s overall ESG rating, while maintaining low active risk relative to a traditional benchmark. As a secondary
goal, optimisation can also yield a lower carbon footprint relative to the relevant benchmark.