Should your ESG portfolio be active or passive?

Automation and efficiency vs. obstacles and opportunities lost

Andrew Willis 24 September, 2019 | 1:12AM
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This video is a part of our ESG Special Report week

Andrew Willis: Earlier this year, we explored the blurring lines between active and passive management and found important and mutually beneficial intersections between new technologies and active expertise. But when it comes to sustainable and responsible investing, which is better?

You might be tempted to go with ETFs – after all, it’s hard to argue with the extremely low fees. But, as recent events with the Vanguard ESG ETF show, the passive approach could go horribly wrong. Because of automated investing, investors in the fund ended up holding gun stocks – true, it was a tiny part of the portfolio and was quickly corrected, but for a that short while, the fund did hold guns.

This highlights a greater underlying problem with a purely passive approach to something like responsible investing – which is both subjective, and constantly evolving. For example, passively managed funds track indices with wide differences in their ESG ratings. While on the other hand, actively managed funds cost a lot more.

As with most things, the truth is somewhere in the middle. Passive screening, with active engagement could be a good middle ground. Active or passive, ask yourself questions like, is my asset manager engaging with companies? How is my manager voting in issues related to ESG concerns? The answers will tell you how committed your manager is to the cause.

For Morningstar, I’m Andrew Willis.

You can find our page on Sustainability here

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About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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