Bright spots for active managers are few and far between these days. One potential bright spot is ESG. Britton O’Daly in the Wall Street Journal noted the recent jump in ESG assets under management and this:
“Active managers look at ESG and think: ‘Here is a space where I can justify some fees,’ because it truly is harder to do,” said Robert Jenkins, the global head of research at Lipper.
But even in ESG, ETFs or exchange-traded funds, are making an impact. Lara Crigger at ETF.com notes the jump in ESG ETFs, especially for low-cost, core-type funds.* She writes:
Flows data suggests that ETF investors are approaching socially responsible investing not as a thematic play but as an investment lifestyle, hoping to convert some or all of their existing asset allocations to more ethically acceptable alternatives without sacrificing market performance.
Whenever you seen an investment them take off, you should take a beat. What you see on the surface, may not be accurate.
Demonitized at Epsilon Theory has an interesting post up talking about how words and symbols, i.e. advertising, change how we think and speak. This ‘manipulation’ is relevant for ESG:
Fancy Asset Manager: What you call ESG was invented by guys like me. To gather assets.
That isn’t to say there is something wrong with ESG, or pursuing ESG-type strategies. The point is that you need to be wary when someone, anyone, is trying to sell you a higher fee strategy. Especially one that depends on your desire to be virtuous with your money.
In the end there is difference between virtue-signaling and actual virtue. ESG strategies are going to become mainstream in the investing world. Some theorize that ESG will become integrated in all investment strategies in the future!
The trillion dollar question is whether ESG is going to have a positive impact on the real world. As Dave Nadig at ETF.com notes:
“No ETF issuer is making an impact simply by launching an ESG fund. The heavy lifting is done by the companies in the funds.”
Cullen Roche at Pragmatic Capitalism echoes this idea when writing about how to go about ESG:
“I am all for investing morally, but I think it should be done in a way that we can maximize the impact and the fact is, the best place to enact change is in the real economy and not secondary markets.”
Where does that leave someone who wants to invest their money with a conscience? Pretty much where we were before ESG became more mainstream.
Be wary of money managers who overpromise and underdeliver. Be focused on fund costs and portfolio construction. And be on the look out for ways to make an impact in the real world, not the one that blinks green and red on days the stock market is open.
*Nir Kaissar at Bloomberg thinks customizable portfolios will be the way investors access ESG strategies.
