Sustainable

ESG data in the fixed income space is often limited and typically covers only up to 60% of the investable universe, so index construction can be difficult and unreliable. Active managers are able to fill this data gap through rigorous in-house research.

Different ESG data providers often award the same company vastly different ESG scores based on the issues they consider material. For example, Tesla typically gets a high environmental score for its work on electric vehicles but is given a low governance score and marked down for toxic material mining practices. So is it a good or bad ESG investment? That will depend heavily on the data provider, and what weighting their scoring process gives to the E versus the G.

Active research takes into account qualitative metrics such as controversies, which rules-based models often struggle to pick up. Even when they do, what some of these models consider material may not be a negative issue. For example, the Asset4 model considers acquisitions a ‘controversy’, something the TwentyFour portfolio management team may disagree with in certain circumstances, since acquisitions are not inherently negative to bondholders and as such should be judged on a case by case basis.

Passive funds can become forced buyers when an index is rebalanced, and conversely cannot sell out of a company that is in the index. As a result, engagement that will actually drive change is difficult or impossible.

Passive investing doesn’t take into account momentum, i.e. a company’s movement in the direction of positive or negative change. Negative screening rules can work in some circumstances, but the role of sustainable investing is also to push for better ESG outcomes, for which an active approach is far better suited.