Why Active Is Critical to ESG Success

August 30, 2022

---

“Over the long term, the importance of an active approach to sustainable investment will only become increasingly obvious.” That is the main point of a new op-ed in the Financial Times by Rory Bateman, co-head of investment and head of equities at Schroders. Bateman – an active manager himself ­– puts forth a principled argument as to why active is the best choice for the growing body of investors concerned about ESG factors.

Active’s Research Advantage

Bateman writes that active decision-making and active research is a necessity for proper ESG investing. He notes that due to the “stark inconsistencies” and the “backward-looking” approach of the various ESG rating systems, it is difficult to compute the true ESG scores for companies in a passive ESG index.

On the other hand, an active manager is better positioned to make those determinations through fundamental research, analysis, and the ability to weigh new developments. Major changes that could take months to be picked up by quantitative analysis are instead incorporated by an active manager making active decisions. Russia’s invasion of Ukraine is just one example of how fast ESG scores can shift.

Active Managers Can Advocate for Change

Another factor as to why active is crucial to ESG investing is that active managers can use their muscle to advocate for change by engaging and influencing portfolio companies. Bateman writes that “active managers’ extensive insight and knowledge into companies and industries is critical to meaningful and thoughtful discussion.”

In addition to engagement, active managers also have the capability to measure progress in real-time. Bateman writes that only active managers can get granular and nuanced on ESG factors like carbon emissions. He writes “a scaling up of thoughtful, critical analysis and diligence is far more difficult to replicate” for passive ESG investments.

For more, check out the full op-ed here.