Passive fund houses have been urged to pressure index providers to omit “coal laggards” from mainstream indices to help the transition to net zero.
Only 15 per cent of index-tracking and exchange traded fund assets are in products that track indices integrating environmental, social and governance criteria in Europe.
This leaves more than €1.9tn assets in European funds that track non-ESG indices, estimates based on Morningstar data suggest.
While actively managed funds can adjust their strategies to meet ESG investment criteria or integrate ESG data, passive funds run the risk of losing clients if they change the indices they track to versions that integrate ESG criteria, experts said.
However, Reclaim Finance, a Paris-based non-governmental organisation, said asset managers should be willing to take this risk to make their passive funds more environmentally friendly.
Lara Cuvelier, who leads investment campaigning at Reclaim Finance, said groups should “engage with other asset managers to ask index providers to identify and exclude coal laggards from main standard indices”.
Responding to the concern that changing passive funds in this way risked losing clients, Cuvelier said not doing so “exposes clients to stranded asset risks by not applying a precautionary approach on climate risks”.
Michael O’Riordan, founding partner at Blackwater Search & Advisory, said: “If [asset managers] were really serious about ESG, and not simply treating it as an opportunity to sell more products, then they would change their entire investment process and fully integrate ESG.”
“Right now, they are cherry picking and using the excuse that ‘our clients still want exposure to the FTSE 100’ […] Providers really want to have their cake and eat it,” O’Riordan said.
However, index experts defended the maintenance of existing non-ESG indices.
Jay Watson, head of quantitative analytics at The Index Standard, an index research group, said changing existing indices to be ESG “is not the way to go” as it would “undermine investors’ confidence in the whole index concept”.
“Choosing to buy an electric car instead of a petrol-engined car may be a good thing to do. But your garage replacing the engine of your existing car with a battery and electric motor at your car’s annual service without telling you is not,” Watson said.
Meggin Thwing Eastman, MSCI’s head of ESG research, Europe, the Middle East and Africa, said: “More choice is one way to make it possible for more investors to adopt a sustainability strategy. The important thing is clarity and transparency in disclosures and reporting so that investors can make informed choices.”
“The challenge of making investing more sustainable isn’t solely a market responsibility. Governments, regulators, investors, consumers and non-market participants all have a role to play in that total system shift,” she added.
Index providers including MSCI and S&P Global have launched an initiative aimed at supporting net zero goals by committing companies to “align all relevant services and products to achieve net zero greenhouse gas emissions by 2050 or sooner”.
But the Net Zero Financial Service Providers Alliance does not commit index providers to take action on existing indices.
Cuvelier said the initiative was “not sufficient at all given that creating new funds or indices has never been enough to reduce flows going to non-net-zero aligned products”.
O’Riordan said it would take time for the “natural transition” from mainstream indices to ESG versions of them to take place.
The Index Industry Association did not respond to a request for comment.
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