it is incredibly naive to think that index funds don’t have to do due diligence. you’re simply shifting the diligence from the manager to the index provider and their methodology. what index does the index fund track? how it it composed? what’s the difference between a market cap weighted index and a factor based index? Morningstar has over 2,200 ETFs in it’s database (which isn’t a perfect way to count—it leaves out a lot and there’s overlap with actively managed ETFs, which I don’t like—but it’s a good place to start).
leading with questions about ESG analysis actually SAVES us a significant amount of time in due diligence, by focusing our efforts on funds that we’d actually use. I screen out a lot of providers who can’t answer basic questions from the PRI about ESG integration. Again, I fundamentally believe that ESG analysis improves the security selection process, both in terms of active and passive managers, and can lead to superior risk-adjusted returns.
worth noting that this is an asymmetric process: there are only a handful of reputable (in my opinion) ESG data providers. Once I’ve familiarized myself with their methodology, I only need to keep up with what they’re doing (and select continuing education opportunities to stay on top of the evolution of the industry) and I can get a good feeling for how managers treat this data in conversations with them.
It is, admittedly, very hard for me to compare our DD process with other firms, as we’ve developed it ourselves, and everyone treats diligence differently. I would suspect (but have no evidence) that some advisors do minimal diligence and pick funds based on which wholesaler brings them the best gifts or pays the biggest commissions. would you think this is a better way to approach manager selection?
Yes but obviously index funds have to do much less due diligence—they don’t have to look at the performance of individual companies, nor do they have to look at anything related to ESG. They only have to monitor index composition and things like that, which is less burdensome, much less so relative to the total number of investments you can make .
You initially said ”...this is why I spend so much time looking at methodologies behind ESG ratings and the way mangers apply them.” which suggests to me a significant time sink in the name of impact. Socially neutral investors do due diligence to try and find profit-making companies and so don’t face this burden—presumably you also do due diligence on financial returns? ESG analysis wouldn’t save you from doing due diligence on financial returns, would it?
It is difficult to believe that legions of investors are stupid enough to miss out on the benefits of ESG screening that you allege.
it is incredibly naive to think that index funds don’t have to do due diligence. you’re simply shifting the diligence from the manager to the index provider and their methodology. what index does the index fund track? how it it composed? what’s the difference between a market cap weighted index and a factor based index? Morningstar has over 2,200 ETFs in it’s database (which isn’t a perfect way to count—it leaves out a lot and there’s overlap with actively managed ETFs, which I don’t like—but it’s a good place to start).
leading with questions about ESG analysis actually SAVES us a significant amount of time in due diligence, by focusing our efforts on funds that we’d actually use. I screen out a lot of providers who can’t answer basic questions from the PRI about ESG integration. Again, I fundamentally believe that ESG analysis improves the security selection process, both in terms of active and passive managers, and can lead to superior risk-adjusted returns.
worth noting that this is an asymmetric process: there are only a handful of reputable (in my opinion) ESG data providers. Once I’ve familiarized myself with their methodology, I only need to keep up with what they’re doing (and select continuing education opportunities to stay on top of the evolution of the industry) and I can get a good feeling for how managers treat this data in conversations with them.
It is, admittedly, very hard for me to compare our DD process with other firms, as we’ve developed it ourselves, and everyone treats diligence differently. I would suspect (but have no evidence) that some advisors do minimal diligence and pick funds based on which wholesaler brings them the best gifts or pays the biggest commissions. would you think this is a better way to approach manager selection?
Yes but obviously index funds have to do much less due diligence—they don’t have to look at the performance of individual companies, nor do they have to look at anything related to ESG. They only have to monitor index composition and things like that, which is less burdensome, much less so relative to the total number of investments you can make .
You initially said ”...this is why I spend so much time looking at methodologies behind ESG ratings and the way mangers apply them.” which suggests to me a significant time sink in the name of impact. Socially neutral investors do due diligence to try and find profit-making companies and so don’t face this burden—presumably you also do due diligence on financial returns? ESG analysis wouldn’t save you from doing due diligence on financial returns, would it?
It is difficult to believe that legions of investors are stupid enough to miss out on the benefits of ESG screening that you allege.