What are the differences between ESG/SRI ETFs and ESG investing in unit trusts? (SG)
ESG/SRI ETFs are typically passive index funds that track a certain market index. They usually employ a simplistic negative screening ESG process, which excludes companies with the lowest ESG ratings. These ESG ratings are usually provided by a third party data provider such as MSCI and Sustainalytics, and some challenges of relying an ESG fund on such ratings are that they are highly dependent on company disclosures, and that there is a high degree of dispersion amongst ratings by different data providers based on the rating methodology that each uses.
Most actively-managed ESG funds are offered to investors in a unit trust rather than ETF, and we believe there are certain benefits of an active approach to ESG investing. It is hard to quantify all the ESG aspects of an investment, therefore a more active approach to assessing companies would provide a more holistic perspective on companies’ ESG profile. Active managers can also be more involved in ESG engagement to push companies to improve on their ESG performance. The more holistic incorporation of ESG information and the ability to create change on the ESG side would hopefully lead to ESG alpha in the long term.