ESG & passive investing

[Urbandreamer]

I confess that I don't normally post on this board, because I regard myself as an active investor.

Despite that I do in fact have a number of index trackers in my Aviva pension.
Yesterday I received a letter from them saying that some of these index trackers, would no longer be tracking the existing index!

Instead the investment manager (Blackrock) is going to compile a new set of companies that they intend to track!

Apparently (from the letter) this is following Aviva's baseline exclusion policy, except it is not! That policy applies to active funds.

We aim to apply these baseline exclusions to all actively
managed funds and mandates managed or operated by us.

Now don't get me wrong, I actually agree with some, though not all, of Aviva's exclusions. However as I said, I regard myself as an active investor. It is of course right and good that people like me chose what we want to support. Would it be right for me, or people who share my opinions, to change your passive portfolio?

As it happens this action is not really going to affect me as I intend selling my existing Aviva funds in the next six months, transferring the funds to my SIPP. That was true before this event and not as a result of it.

[baldchap]

I would agree that anything with ESG applied is not truly passive. Mind you the same could be said for 'dividend' and 'quality' ETFs.

Personally I am not a fan of anything labelled ESG, or Trust managers who treat it like a new religion.

Interestingly the LG ESG dividend ETF (LDUK) has a defence company and miner in its top 10, but no tobacco or oil.
Make of that what you will.

[xxd09]

Investing is a very human behaviour and subject therefore to all that entails
One well known aspect of human behaviour is following the latest fad -especially as fads are currently exaggerated out of all proportion nowadays with the 24 hour news cycle and social media
ESG has been right up there with all the latest fads
Whether this makes for more successful investing is open to question
Active investors obviously regard using ESG criteria for share selection as valid with opportunities for them to make money-rightly so.
Index investors however not so much and the managers of these type of funds are now backing off as they should -using “fads ” to skew indexes is not what investors in these funds signed up for
xxd091

[Urbandreamer]

Index investors however not so much and the managers of these type of funds are now backing off as they should -using “fads ” to skew indexes is not what investors in these funds signed up for
xxd091

With respect, that is not my experience, or the experience of quite a number of others.
As I said, Aviva has gone from ignoring this "fad" to embracing it.
They represent quite a number of people.

https://www.aviva.co.uk/business/workplace-pensions/

We currently provide workplace pension schemes for some of the UK’s best-known companies, offering a range of investments and support for over 4 million pension scheme members in more than 26,000 schemes.

For anyone interested, here is a link to what they are doing, and their reasons.
https://www.google.com/url?sa=t&rct=j&q ... i=89978449

[genou]

I would agree that anything with ESG applied is not truly passive. Mind you the same could be said for 'dividend' and 'quality' ETFs.

There's a religious argument hiding in there, I suspect. The fund is passive - it is just follows an index with ESG rules. The argument then becomes one about liking the rules of the underlying index or not, but it doesn't make the fund active, any more than choosing between a FTSE or MSCI index. You'll possibly pay a ba'hair more for an ESG/whatever based fund cos the index costs more.

I don't follow the remark about Blackrock constructing their own list of companies; that would imply that they are going into the indexing business, or the fund is not passive in any sense.

[Lootman]

I don't follow the remark about Blackrock constructing their own list of companies; that would imply that they are going into the indexing business, or the fund is not passive in any sense.

Blackrock owns iShares so they are already heavily into the indexing business and know how to do it.

The line between active and passive gets blurred in the case of some of these more focused indexes, which really express a market view, such as that ESG companies will do better.

Personally I would not touch an ESG fund, active or passive.

[Alaric]

The fund is passive - it is just follows an index with ESG rules.

Once the premise of investing blindly in a market is broken by not following a whole market index, isn't that a nod at least in part to active investment? It's either a political gesture of disapproval or a deliberate attempt to dump shares of Companies considered likely to under perform.

[richardsun]

Thanks urbandreamer for bringing this up, it made me take a look at my own pension (Royal London) where the only trackers available are also by Blackrock. And sure enough the same applies here, the fund factsheets state that Blackrock apply an ESG 'filter' to the index. Seems to have been the case since June 2021.

I'm a bit conflicted - I agree that for a passive tracker the fund managers shouldn't be messing with the index. I also feel that the ESG label is something of a fad, and perhaps just a box-ticking exercise for many companies. On the other hand, I'm not exactly thrilled about investing in landmine manufacturers etc. But it raises the question of who is to act as the 'judge' of a companies ESG credentials? It's a moral maze, and definitely starting to stray from the purity of passive investment.

However, I've just compared the performance of the Blackrock World ex-UK tracker versus a comparable HSBC tracker (with little/no ESG filter) and it seems there has been basically no difference in recent past performance. So for now I'm going to choose to not worry too much!

[Urbandreamer]

I would agree that anything with ESG applied is not truly passive. Mind you the same could be said for 'dividend' and 'quality' ETFs.

There's a religious argument hiding in there, I suspect. The fund is passive - it is just follows an index with ESG rules.

I disagree.

Did you follow the Aviva link that I posted?
There is a difference between companies that mine coal and those that mine .... coal.
Between who companies sell their product to. If they only sell to the government then they are OK. If they sell to US citizens, legally, then they are not.
If they decide to sell into a different market, then they move from pariah to OK or back again.

The company that made Hovis bread and McDonald flour has been sold to a pension fund, but they would be verboten, because they didn't just sell to Mr Bond*.

Basically the "rules" don't lend themselves to passive investment, because they rule on things that change. Aviva even state that they seek to change those things, so that companies would move from pariah to OK.

*They made the gun he carried, which is also sold throughout the US.

[xxd09]

When I buy a plain vanilla world index tracker -that’s what I want
I don’t want fund selection to be run through any filters and that includes ESG
If these “green” companies come good they will soon become part of the index in their own right-that’s the way it should be
Selecting shares on religious grounds,green grounds or political grounds etc is not what world index tracking is about -its active investing
I understand Vanguard and Blackrock are now backing off this behaviour-no doubt due to investors complaints -they probably thought it was a good marketing ploy a la Bud Light-but it has now back fired
xxd091

[tjh290633]

When I buy a plain vanilla world index tracker -that’s what I want
I don’t want fund selection to be run through any filters and that includes ESG
If these “green” companies come good they will soon become part of the index in their own right-that’s the way it should be
Selecting shares on religious grounds,green grounds or political grounds etc is not what world index tracking is about -its active investing
I understand Vanguard and Blackrock are now backing off this behaviour-no doubt due to investors complaints -they probably thought it was a good marketing ploy a la Bud Light-but it has now back fired
xxd091

You have the wrong end of the stick. They don't filter out the ESG companies. It's the ones that do not follow ESG principles in the managers view. That could exclude oil, miners, aircraft manufacturers, armaments, etc. according to his views. The tree huggers are included, not excluded.

TJH

[Alaric]

They don't filter out the ESG companies. It's the ones that do not follow ESG principles in the managers view. That could exclude oil, miners, aircraft manufacturers, armaments, etc. according to his views.

Isn't the theory of index investing that you should invest in a whole market because individual stock or sector picking doesn't work, or at least doesn't work without increasing risk? Removing companies deemed not ESG arguably breaks this.

[Urbandreamer]

They don't filter out the ESG companies. It's the ones that do not follow ESG principles in the managers view. That could exclude oil, miners, aircraft manufacturers, armaments, etc. according to his views.

Isn't the theory of index investing that you should invest in a whole market because individual stock or sector picking doesn't work, or at least doesn't work without increasing risk? Removing companies deemed not ESG arguably breaks this.

Actually no it's not. That is one form of index investing. You can also produce an index that, rather than the whole market, you limit yourself to the biggest 100. Like for example the FTSE 100. You can produce an index of companies in a specific geographical area, or another of companies that work in a given field.

The point about these passive approaches is that they are mechanical. No subjective choices are usually required when compiling the index, though the investor may chose between them. For example choosing a S&P tracker over the FTSE 100 or a World tracker that excludes the UK as many of their other risks are UK based.

My issue with ESG in this respect is that it HAS to be subjective. How is a computer to feed company governance into the formula? What of the use to which a companies products (guns) are put? Is investing in a "defense" company that supplies a belligerent country with a bad human rights history better than a company that supplies the citizens of a country with weapons as per their constitution? Aviva thinks the former to have better ESG credentials. How are numbers put to the environmental and social aspects of something like a palm oil producer for a formula. A large mono crop replacing bio-diverse wild land, that also provides the bulk of employment with the company providing social good in terms of education and housing?

As an active investor I can and do think that I should care. But what I can't claim is that my values are universal or mechanical. That is the reason that I strongly question the use of "ESG" in indexing.

If you do want to follow Alaric's policy, simply buying the market. Then that option should be available to you. It isn't if your pension is with Aviva.

[GeoffF100]

Strictly speaking a passive fund is a market weighted tracker. That excludes the S&P 500, which excludes companies that do not meet its criteria. Notably, companies have to be profitable to be included. That rule excluded Tesla until recently. Even purely market weighted indexes exclude tiny companies, or just sample them. Nonetheless, Jack Bogle considered the S&P 500 to be a passive index. People often apply the term "passive funds" to funds that are really algorithmic trading, e.g. quality or value index funds. There is sometimes an element of human judgement too. The S&P 500 composition is decided by a committee. Language usage is what it is, and it is not always helpful.

Buying an ESG fund because you believe that the companies that you do not like will suffer price falls as a result is futile. There are too many active investors for that to happen. In reality, you are just buying a less diversified and probably more expensive fund. It may give you a lighter conscience, but there may be a price to be paid for that.

A more knotty issue is the exercise of voting rights:

https://www.spglobal.com/marketintellig ... c-73332273

Vanguard is being banned from providing market weighted trackers in some instances.

[Dod101]

I am not sure what this discussion is about, so called trackers that decide to exclude non ESG compliant companies or companies that follow ESG principles. Obviously a tracker must hold all the shares in a tracker, ESG compliant or not, otherwise it is not tracking an index.

I think the problem with ESG companies is that up to a point I can see some benefits but as usual, we Brits take this much too far and throw out a lot of babies with the bathwater.

Dod

[OhNoNotimAgain]

Strictly speaking a passive fund is a market weighted tracker. That excludes the S&P 500, which excludes companies that do not meet its criteria. Notably, companies have to be profitable to be included. That rule excluded Tesla until recently. Even purely market weighted indexes exclude tiny companies, or just sample them. Nonetheless, Jack Bogle considered the S&P 500 to be a passive index. People often apply the term "passive funds" to funds that are really algorithmic trading, e.g. quality or value index funds. There is sometimes an element of human judgement too. The S&P 500 composition is decided by a committee. Language usage is what it is, and it is not always helpful.

Buying an ESG fund because you believe that the companies that you do not like will suffer price falls as a result is futile. There are too many active investors for that to happen. In reality, you are just buying a less diversified and probably more expensive fund. It may give you a lighter conscience, but there may be a price to be paid for that.

A more knotty issue is the exercise of voting rights:

https://www.spglobal.com/marketintellig ... c-73332273

Vanguard is being banned from providing market weighted trackers in some instances.

Wrong, a passive fund follows an index. Choosing to weight that index by market cap is an active decision. An index can be constructed in a variety of ways.

[GeoffF100]

I am not sure what this discussion is about...

There are sound reasons for buying a market weighted tracker. Picking and choosing which shares you hold may turn out well, but only if you are lucky, and your luck will not hold out forever.

In theory, a market weighted tracker gives the highest risk adjusted return. It is also the cheapest type of fund to implement. Every dollar that beats a market weighted tracker is matched by another dollar that loses to the tracker by the same amount. The evidence shows that there is no way of knowing in advance which dollars will win and which will lose.

[GeoffF100]

Strictly speaking a passive fund is a market weighted tracker. That excludes the S&P 500, which excludes companies that do not meet its criteria. Notably, companies have to be profitable to be included. That rule excluded Tesla until recently. Even purely market weighted indexes exclude tiny companies, or just sample them. Nonetheless, Jack Bogle considered the S&P 500 to be a passive index. People often apply the term "passive funds" to funds that are really algorithmic trading, e.g. quality or value index funds. There is sometimes an element of human judgement too. The S&P 500 composition is decided by a committee. Language usage is what it is, and it is not always helpful.

Buying an ESG fund because you believe that the companies that you do not like will suffer price falls as a result is futile. There are too many active investors for that to happen. In reality, you are just buying a less diversified and probably more expensive fund. It may give you a lighter conscience, but there may be a price to be paid for that.

A more knotty issue is the exercise of voting rights:

https://www.spglobal.com/marketintellig ... c-73332273

Vanguard is being banned from providing market weighted trackers in some instances.

Wrong, a passive fund follows an index. Choosing to weight that index by market cap is an active decision. An index can be constructed in a variety of ways.

As I have said, language usage varies and is not always helpful.

[Lootman]

Wrong, a passive fund follows an index. Choosing to weight that index by market cap is an active decision. An index can be constructed in a variety of ways.

As I have said, language usage varies and is not always helpful.

And not helpful at all in this case. Ohno's claim that choosing market weight is an active decision is wrong. It is in fact the default decision, since that is the way that the major market indices are constructed. (Some exceptions, such as the DJIA).

So within the index investing universe, market-weight indices are the natural default choice, and so are truly passive. Active index investing is fiddling around with indices in order to express a slanted market view. Whether that view is ESG, choosing only shares that pay dividends, or anything else is besides the point - you are overlaying a bias onto an otherwise natural universe of shares.

And that is of course why so many "active" index funds have to invent an index. Even Cathy Woods and her gung-ho maverick big bets on disruptive technology companies is wrapped in an ETF, and so follows an "index". But that "index" is a made up collection of her favourite shares and can change all the time on her whim. So in what sense is that really an index at all? It is more just an active template of her best ideas at any given point in time. Maybe that is "passive" investing to Ohno, but you would be laughed out of the room if you said that at any fund management house that I am familiar with.

[Urbandreamer]

I am not sure what this discussion is about, ...

Dod

Well my intention was that people be aware that they may not be investing in what they think that they are investing in.

If, as one poster has remarked, performance is similar and you don't care once you have established the facts, then good for you.
If you don't know, well I'd like you to either find out or decide in advance that you don't care.

What I would be unhappy about is people believing that they are investing in a certain way, when in fact they are not.

Statements have been made on this thread that I'm sure are believed to be true, that are in fact not true.

An index is just that. It doesn't HAVE to be weighted to the large cap companies. That is simply the method used to produce a lot of them, there are small cap indices and thematic indices.
An index can exclude certain parts of the market, as I pointed out in my first post. Claiming otherwise doesn't change the facts as they exist.
There are many who provide such indices, Morning Star is just one provider. This link introduces you to the range that they provide.
https://indexes.morningstar.com/indexes/screener

My issue is that the names of my Aviva investments, I.E UK equity index tracker have not changed, but what they track HAS. They are now excluding things that they previously did not. I'm also less than happy with their exclusion choices.

As I said though, it won't affect me for long as I shall be consolidating my DC schemes into my SIPP.