- Fiduciary Management
By Tony Kao
We view blacklists as a form of ESG exclusion and there are drawbacks to applying ESG-motivated tilts to broad asset categories or investing through ESG-oriented index funds focused on exclusion. Our view is that the greatest potential from ESG is its application as close to the actual investment as possible through ESG integration or impact investing.
These approaches allow for thoughtful exclusion of companies where required but also the opportunity for engagement. Each investor should make their own choice based on their ESG beliefs and specific circumstances, but we think there is a significant opportunity for the industry to adopt engagement oriented approaches.
The industry is using divestment to meet ESG-related objectives, particularly as it relates to carbon-intensive industries and some asset allocators are implementing this through index funds, which rely on ESG ratings from various ESG evaluators to exclude companies. However, this approach can lack precision and can introduce potentially unintended tilts and exposures such as a bias towards large cap companies and certain sectors.