Morningstar: passive funds rapidly entering the ESG investment space

Passive investments are increasingly penetrating the ESG ecosystem, versus a traditional role in active investing, according to industry insiders.

In fact, passive investment now represents almost a quarter of ESG fund assets globally, with asset management giant BlackRock increasingly dominating the space, said Hortense Bioy, global director of sustainability research at Morningstar (above).

“The discourse in passive ESG funds is a direct result of technological advancements," Bioy told a conference in London. 

"This means innovation in indexing, but also improved company ESG data over the past five to ten years," she explained.

Impact and ESG have long be seen as a motivator for using active funds rather than passive, as such entities can be better utilised in areas such as engagement and divestment of firms over their climate goals.

Reliable data

Effective impact investing, however, can only be achieved with reliable data sets, stressed Liz Wright, head of sales EMEA at Morningstar Indexes.

“Data is key when it comes to creating [impact] indices," she said. "Our responsibility comes down to how we can use the data that we're getting to be able to say we're putting something out there that's available and creating that impact that we're looking for.

“Data exists alongside regulation, combining both to create something that's going to make an impact and actually create the product that a client needs,” Wright noted.

Bioy and Wright were speaking at an event marking the release of the Morningstar Active/Passive Barometer, a semi-annual report that measures the performance of active funds against passive peers in their respective geographic or Morningstar categories.

Active/Passive Barometer

The barometer spans nearly 26,000 unique active and passive funds that account for approximately €5.1trn in assets. 

The fluctuations of 2022 were an environment where active equity managers could have been expected to beat passive peers more easily. 

However, according to Morningstar the rate of success of active managers in most equity categories in the one-year period to the end of 2022 “failed to impress.”

At the event, Wright also raised the example of an asset manager making moves in the ESG space, singling out French firm Amundi for a policy of committing to an ESG Ambition 2025 Plan. 

Included in the plan is a pledge to include decarbonisation efforts and development of sustainable activities into the assessment of companies held in 100% of all its actively managed open funds.

“Amundi is a provider that is out there, taking net zero and being serious about it now,” said Wright.

Last year Jon Hale, Morningstar’s global head of sustainability research, said that despite huge net fund outflows over the last year, sustainability funds have seen significant inflows in the US.