Funds Europe – Do you think there is a danger that as fixed income ETFs develop, we’ll end up following what equities have done?
Kooij – My perception is that a lot of the investor base is more retail. It is younger, it’s those people who are able to jump on to the stories because ETFs through their labelling can do so in a better way. My concern with a lot of ETFs, particularly equities, is that they’re too reliant on third-party data to classify themselves as ESG. For fixed income, the danger is even greater. A lot more activism is required and a lot more of an intervention is needed so that the money isn’t just blindly going into somewhere where ideally it shouldn’t be, for example funding tar sands.
Sanguinetti – Issuers have to be extremely transparent with the investors because there is no standard. Everyone is doing their own thing. That stamp of approval that they are getting from somewhere else, it doesn’t really have any meaning if they can’t show real proof to their investors of what they are doing in practice. It’s all about the transparency.
Redding – Where we see a lot of the research and development going on at the index level, which will probably make it to the investment product level in a couple of years, is on the ESG fixed income side. When you think about the excitement around this and where it could go, what we can start talking about longer term is: why can’t we import a lot of what we’re doing in normal equity investing now to the fixed income space?
This all comes down to the data. How do you do global ESG indexes when regulation is cropping up in different parts of the world? It’s easier for climate, there’s a bunch of issues there, but you can do math and get a global standard on emissions; the problem that occurs on the S side is how do you view S in the US versus Europe versus parts of Asia?
Baccash – It’s making sure that you’re going to do what you’ve told the investors. One of the big benefits of ETFs is that you’re telling them, ‘This is what’s going to be happening,’ particularly on the passive side, making sure that it’s consistent and meeting that need and meeting that criteria. Even if you have fund complexes that are doing this in multiple parts of the world and they’re telling their investors in the same way, it naturally creates that bridge to getting that more consistent approach. It’s a complex topic that’s going to take evolution to get there.
Funds Europe – If asset managers implement ESG criteria across their entire business, as many of them claim, does this mean passive ETF managers should vote shares in accordance with ESG principles, even where the ETF is not specifically an ESG ETF?
Kooij – It depends how much success they want with their ESG product. When we screen for any product, we have a very rigorous process where we assess what the overall thesis and the management approach is at the fund house. It’s really to understand whether or not their approach to ESG, but for us mainly impact, is actually credible. If they’ve got in the higher echelons of their business a cash cow or a large ETF business which is completely agnostic on voting these things, then we don’t have any confidence that there’ll be enough of a motivation for the fund managers to follow through on the right principles that we would expect them to be adhering to.
If they’re signed up to PRI [the UN Principles for Responsible Investment], science-based targets, or any other charters, they obviously could not and should not, and if they are, then they should stop.
Sanguinetti – If they intend to follow their business principles and if they are saying that these are their principles, then they should vote in accordance with them and they should also disclose that to their investor base. It should become the norm and not the exception anymore. The biggest issuers now have tremendous voting powers, and I think it comes with a big responsibility, so it shouldn’t be linked anymore to whether the ETF is ESG or not, it’s thinking what’s the right thing to do in the current world that we live in.
Aviav – Sometimes it feels like no two investors want the same flavour of ESG, and that presents a huge difficulty for fund and ETF managers alike. For example, some ESG funds might be excluding pornography and abortion clinics, etc, while others exclude companies with high carbon emissions. Obviously, investors in both funds have different concerns about the future of the world, and you’d want the voting to be aligned with each fund’s strategy, and different by fund. But I’m not aware of any issuer that offers a different voting policy for two different ESG funds. Asset managers tend to adopt one voting policy across their funds just because of infrastructure limitations. ETFs and mutual funds, and the industry as a whole, are currently limited by the technology available in terms of implementing highly bespoke voting policies.
Ideally, you would want a different voting policy not just by fund, but by client, as the client would probably want the voting policy to be tailored to their needs across the funds and issuers through which they invest, but that’s just not possible with ETFs and funds infrastructure today.
Baccash – A lot of what we do as a banking institution is have an overarching view of all the different data points within the ETF ecosystem, and particularly on ESG funds, so taking that information and being able to transmit it in a way that is consistent and thorough, and giving it back to the client so they could use it in the most efficient manner to make those decisions on behalf of their shareholders or their investors. You want to make sure you’re delivering what you told your stakeholders you would be doing. Our role is to provide the information and make sure that it’s available in a way that’s easy to use, innovative, digital, and to get that back to the client in as efficient a manner as possible.