The Explosion in Index & Responsible Investing
Index investing has grown at a phenomenal rate. Research shows that 16% of the US stock market is now held in these types of securities, greater than owned in active funds. In the last decade $2 trillion has flowed from active to passive securities.
This growth is matched by the explosion in ESG and responsible investing. PWC predict an 84% growth in ESG-focused institutional investment up to 2026, rising from $18.4 tn in 2021 to $33.9 tn in 2026. JP Morgan highlighted that growth in ESG is driven from the bottom up.
According to Morningstar, passive funds labelled as sustainable make up 56% of the total market in the UK. But can index-based sustainable investing tackle the issues that society faces and become responsible investing?
Humanity can’t be passive when it comes to global warming
Today’s human-induced temperature increase is way from the 2015 Paris Agreement’s preferable limit. Scientists have concluded that we need to reduce emissions to 40% of the 1990’s levels by 2030 to maintain the target of 1.5°C. Yet the UN Environment Programme (UNEP) concluded in its 2022 report that there’s “no credible pathway to 1.5C in place”. The current data path indicates that temperatures will rise by 2.4°C to 2.6°C by the end of the century.
“We had our chance to make incremental changes, but that time is over. “, Inger Andersen, Executive Director of UNEP.
The impacts of Global warming aren’t an issue just for the future. We’re increasingly living with and having to adapt to them. Governments and even the military the risks posed by global warming. We are now enduring the climate as its changes deepen from the wildfires worldwide, to the drying up of vital water supplies or the increasing damage of hurricanes. And this is only at a 1.2°C increase; an increase to 2.6°C is unimaginable. Action is required.
The Climate Change Culprits
The fossil fuel industry and its products accounted for 91% of global industrial greenhouse gas emissions in 2015 and about 70% of all anthropogenic emissions. Since 1988 only 25 entities accounted for 51% of global industrial emissions. To narrow it further, seven of these are publicly listed.
The fossil fuel industry has known the link between fossil fuels and global warming since the 1950s. Exxon Mobile’s scientists accurately predicted it back in the 1970s. With this knowledge, the industry
With great marketing gusto, many of the largest companies in the fossil fuel industry have publicly taken steps to reduce their carbon and “go green”. The veracity of their intentions and the effectiveness of their actions are questionable.
The distrust in the industry has led to an increasing number of active investors using, arguably, their most potent form of . The arguments for and against divestment are nuanced and varied, but evidence exists for the effectiveness of divestment.
The study concluded that after divestment selling events, stock prices declined, and over a longer period, cumulative carbon emissions declined too. This academic evidence matches anecdotal evidence we’ve heard from engagements. Active fund managers have divested from companies, who then went to work to lower their emissions and approached the fund managers as worthy of reinvestment. Divestment works.
Passive investment, active divestment, equal responsible investment
Investors can effectively combine the benefits of low-cost index investment with actively tackling global warming through fossil fuel divestment.
Our expertise helps sift through the numerous “shades” of green. We refine fossil-free asset-tracking investments by researching indexes and methodologies. For example, many funds included in the portfolios are In addition, the indexes look to reduce their index-level carbon intensity by 7% each year. An active approach to divestment under the hood of a passive investment. Others use the MSCI Low Carbon Select index methodology, whereby exclusions cover the extraction, production, power generation and even reserve ownership of fossil fuels.
We believe you can do more than divest from the past, you can actively invest in the future, so to promote the low-carbon transition, we have a current allocation to clean energy.
So why are our portfolios named “Responsible”? We believe index investment can and should do more than direct capital to companies with high ESG scores – we know there are large corporations with high ESG scores that may surprise the public and that the scores are not perfect indicators (See Boohoo or how BAT had the 3rd highest ESG score in the FTSE 100).
Responsible reflects our requirement for funds to do more than look at ESG scores and be fossil free. All funds in our portfolios are signed up to the UN PRI and have adopted the 2020 UK Stewardship Code. The UN PRI asks that asset owners are active owners that incorporate ESG issues into ownership, policies and practices, saying they “should take care to file shareholder resolutions consistent with long-term ESG considerations”. The Financial Reporting Council defines stewardship “as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.”
Do Something, For (nearly) Nothing
P1 has worked hard so your clients can benefit from the low-cost asset-tracking investing and our responsible investing expertise.
The P1 Responsible Asset TrackerAsset Tracker Portfolio Service range includes five risk-rated portfolios. The portfolio asset allocation matches our EV risk-rated Asset Tracker Range, so we’re confident you can find a portfolio that matches your client’s profile and investment horizon.
The investment management fee is 0.1% and 0.08% when used on the P1 Platform. The underlying fund OCF for the portfolios ranges from 0.16% to 0.19%.