The trend towards selected divestment from companies who perform poorly against set ESG criteria, has been a boon for the active investment management industry at a time when manager skill at higher cost has come into question. However, the passive leaning, factor based investment industry is quickly catching up with active managers in this area too, with sustainable factor (or ‘smart beta') investing developments increasing in interest and popularity at an increasing rate.
To understand the growing power of the ESG and factor based investing movement, it’s worth reviewing some (fairly) recent asset allocation news:
- Waltham Forest (a North-East London Borough) has pulled out of fossil fuel investment for its local council workers’ pension fund. In September 2016, the £735m pension fund become the first local government retirement scheme in the UK to commit to divesting from all fossil fuels investment
- Southwark, another Central London borough, followed this step a month later to pull out of fossil fuels investment
- The pension fund of Hackney, yet another London borough, announced plans to cut its fossil fuel investment by 50%
These developments all have one thing in common: fossil fuel extractors are likely to suffer significant financial losses in the long-term as the UK government takes greater efforts to tackle climate change and public attitudes towards renewable energy alternatives become increasingly prevalent. Although likely and not certainly, institutional asset owners as well as their third-party managers are taking note of the potential future pitfalls in fossil fuel extractors business model and hedging the risk by acting now.
At the same time, factor investing strategies are emerging as a potent force that brings together many positive aspects from the passive world – low fees, high diversification, high transparency – with that of the active environment – tactical investment selection, strong risk management, high manager skill – to produce indexes that outperform both the passive and active universe.
As investors seek returns in a time of low returns from government securities, the ability to achieve great risk adjusted returns whilst hedging future political and social changes, is just part of the reason for sustainable smart beta’s rise.
Sustainable smart beta is just one of the 30+ investment trends we’ll be investigating over the course of 2017 through our opinion reports, surveys, and events. To request free copies of the majority of these, visit us at www.clearpathanalysis.com.