Institutional investors want passive managers to integrate ESG in fixed income funds

Written by Adam Cadle

03/10/2023

Nearly 60% of institutional investors and wealth managers across Europe would prefer passive fixed income managers to integrate ESG considerations into their benchmark funds, even if this results in a degree of tracking error, research from Tabula Investment Management has found.

More than a third of those surveyed say they want passive managers to take a more proactive approach to ESG – such as optimising strategies to reduce principal adverse impacts; excluding controversial issuers more quickly; and applying stricter standards – but only as long as there is no significant impact on tracking error.

Just 7% of those surveyed said passive managers should stick to tracking the index and not focus on ESG factors. Of the institutional investors and wealth managers surveyed, almost 80% say they produce proprietary ESG ratings at the fund level, while over half rate fixed income funds for their alignment with the Sustainable Development Goals (SDGs).

When reviewing passive funds that use different ESG data to their own, 60% of investors surveyed are happy to invest if the manager uses high quality data providers with robust methodologies. Almost 40% are happy to invest with managers using other ESG datasets if specific outcomes such as excluding the same companies are consistent with their own providers and analysis.

Jason Smith, chief investment officer at Tabula, said: “Passive managers need to work with their investors to ensure they are aligned on ESG issues. As the climate emergency intensifies, it is no longer enough for managers to hide behind an index when it comes to making a difference. Now is the time to demonstrate commitment to ensuring fixed income investments are aligned with the transition to net-zero and more.”

Tabula Investment Management commissioned the market research company Pureprofile to interview 100 fixed income investors working for pension funds, insurers, family offices and wealth managers in the UK, France, Germany, Switzerland and Italy with a total of €150.6bn AuM. The survey was conducted in August 2023.

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