Active investment strategies to capitalize on sustainability opportunities

Published January, 2018 |

Society and sustainability Print

The investing landscape is evolving, and asset managers must adapt their practices in response to a general trend toward passive management.

Active management holds a significant market share of assets invested, a total market value of approximately US$10 trillion, compared to the close to US$6 trillion in passive management, according to Morningstar.1 However, the investing landscape continues to change rapidly, and the trend toward passive management is accelerating. In fact, “in the past four years, passive investments have gone from one-fifth of long-only assets under management (AUM) to one-third today,” according to Bloomberg.2

Environmental, social and governance (ESG) investing can help active managers differentiate their offerings, and ultimately offer greater value to investors. As the investment landscape continues to evolve, institutional shares, retirement shares and platform/wrap-up programs are expected to surge. Given these predictions, active managers should consider ESG as a means of creating wealth for their investors. By incorporating ESG strategies into their mix, asset managers can differentiate from passive management strategies by enabling clients to customize their portfolios based on their needs and preferences.

The rise of ESG investing

Sustainable investing has experienced remarkable growth over the past half-decade. Almost US$9 trillion, or one-fifth of all AUM in the United States, is now invested with ESG considerations, according to the US SIF.3 This number represents a 33% increase since 2014. A study by Calvert Research and Management found a positive link between corporate sustainability efforts and financial performance, which suggests that adoption and implementation of sustainable business practices can create efficiencies that increase shareholder value and mitigate risks.4

Several trends have emerged as a result of the continual growth of sustainable investing and the shifts in the investing landscape:

  • - Sustainable investing is on the rise: a shift in investor preferences and awareness, coupled with improved data, has translated into double-digit growth for ESG investments over the past half-decade
  • - Shift from active to passive: during 2016, US$1 trillion was moved from active to passive investing, as heightened focus on fees and performance has changed the investing landscape
  • - Pressure on fees: increased fee pressure combined with lower market returns from investments could take a heavy toll on margins5
  • - I​​​​​ncreased demand for customization: clients are now demanding increased customization and flexibility, to ensure their portfolios meet their needs and preferences

There is more than one way sustainable investing can be integrated into a portfolio, so active managers may benefit from greater flexibility in meeting individual investment goals. ESG-focused passive investment products exist, but they cannot be tailored specifically to meet investors’ values. Through adoption of sustainable investing practices, active managers have the opportunity to both mutually enhance returns and increase rigor in risk management. 

Adopting an individual ESG product or tool alone will not suffice to future-proof against the rise of passive investment. A holistic go-to-market offering will allow active managers to use their unique position of understanding investor needs to create a robust investment strategy. A robust offering should embed sustainability throughout the business practice, including: (1) leadership governance; (2) an ESG-focused investing strategy; (3) tools; and (4) reporting.

1. Promoting ESG investing through leadership governance 

Delivering any effective and successful go-to-market offering requires a well-established framework and leadership governance. An individual ESG product or tool may provide an investor access to the market, but a new go-to-market offering with a leadership-driven strategic vision will enable active managers to meet investors’ needs and drive an increase in AUM.

Understanding the importance of a clear strategy and vision, JP Morgan Asset Management formed a leadership framework to develop a sustainable investing strategy and help investors achieve their ESG investment goals. This framework is called the Sustainable Investment Leadership Team (SILT), consisting of “senior leaders, portfolio managers and client advisers at JP Morgan AM and led by the joint head of strategic product management and ESG lead for global investment management.”6

Large active managers can capitalize on establishing a strategic leadership framework by bringing leading practices across investment capabilities and asset classes, and cross-departmental collaboration. With the rapid growth within the sustainable investing sector, active managers will benefit from a clear vision outlined by a strategic ESG approach. As a result, active managers can deliver the ideal mix of ESG data reporting, tools and asset classes to continually grow their AUM and establish themselves as premier players in the industry.

2. Introducing an ESG-focused investing strategy

In the past few years, different asset classes and investment vehicles have been engineered with the aim of providing greater customization. With this increased availability of products, an ESG-focused investment strategy can be constructed while also considering investor goals and risk profiles. Additionally, active managers may use the private markets to access products that generate a higher impact, while passive ESG instruments lack this flexibility.

There is a range of asset classes and investment vehicles available to asset managers seeking to structure an ESG-focused investment portfolio. The list below highlights some examples:

  • - Bonds: EIB Climate Awareness Bond; World Bank Green Bond; DBEDT Hawaii State Bond; Alta Wind Holdings Bond
  • - Funds: Calvert Equity CSIEX; Calvert Bond CSIBX; Parnassus Equity Income PRBLX; Domini Social Equity DSEFX; Global Alternative Energy CGAEX; Global Water CFWAX
  • - Exchange-Traded Funds (ETFs): iShares MSCI KLD 400 Social ETF; iShares MSCI ACWI Low Carbon Target; SPDR SSGA Gender Diversity Index ETF; SPDR S&P 500 Fossil Fuel Free ETF; Barclays Women in Leadership ETN; OppenheimerFunds ESG Revenue ETF
  • - Indexes: Northern Trust’s Real Estate Index, in collaboration with GRESB; Bloomberg Barclays MSCI Socially Responsible Index; STOXX Global ESG Leaders Index

Asset managers should re-engineer the traditional risk profile questionnaires provided to investors, to include questions relating to ESG-specific preferences and goals. As evidenced above, asset managers may choose from numerous asset classes and investment vehicles to shape their investors’ ESG investing strategies, depending on their goals and risk profiles.

Crucially, asset managers can work with prevalent industry players such as MSCI and Sustainalytics to target the issues most demanded by investors and differentiate their offering. Asset managers can also provide individualized vehicles to meet the needs of investors through launching unique indexes or ETFs. MSCI allows clients to create thematic indexes to enable investing based on a demographic trend.7 Similarly, Sustainalytics allows the creation of ESG and sustainability indexes with the backing of their sustainability research and support services.8

3. Enhancing tools 

Digital innovation has evolved clients’ expectations of financial services and investing. Investors are demanding more tools and educational materials, in addition to an enhanced user experience. Institutional and retail investors are demanding better tools within sustainable investing to enable them to make more informed investment decisions. Some players in the industry have already rolled out products, but with the continual growth of ESG investing, more tools and educational materials will continue to emerge to satisfy this increased demand.

State Street recently announced its launch of a new set of analytical tools aimed at capitalizing on the appetite for responsible investing. To help in its effort, the Boston-based bank has facilitated discussions with more than 15 research firms, including MSCI, Sustainalytics and TruValue Labs, to license their data. State Street plans to add those companies’ research and ESG ratings alongside its existing risk-management and analytics systems for approximately 300 investors. The plans follow efforts by State Street’s money-management division, State Street Global Advisors, to add several ETFs and other offerings that invest in assets that screen stocks for environmental and social-justice criteria.9

In 2017, Scotia iTRADE rolled out Canada’s first sustainable investing tools for direct investors. The new tools provide detailed ESG data. The ESG research and ratings underpinning Scotia iTRADE’s sustainable investing tools are provided by Sustainalytics, a global independent provider of ESG research and ratings to asset owners and investment managers. This tool also enables investors to access a holistic view of a company and easily identify ESG leaders and laggards within an industry group.10 

4. Providing ESG reporting 

Recent studies show that, in the long term, investments with ESG considerations tend to outperform those without, and prove to be a more effective way to manage risk. With performance concerns dissipating, the current obstacle impeding ESG integration is the lack of ESG data and reporting. According to a study by State Street,

  • “60% note a lack of industry standards for measuring ESG performance as a significant barrier to full integration. 46% of retail investors want to see more companies reporting ESG performance-related data and 46% say they need more ESG data from other sources to make educated decisions.”

Governmental and regulatory agencies have not yet established a gold standard reporting framework, but several players, such as MSCI, have recently released “good practice” guidelines aimed at creating a more consistent approach. In 2017, the London Stock Exchange also issued guidance which sets out recommendations for “good practice” in ESG reporting. The guide responds to “demand from investors” for a more consistent approach to reporting that is now a core part of the investment decision process and enables investors to make more informed investment decisions. The creation of ESG indexes will “support common approaches to ESG investing, and help institutional investors more effectively benchmark ESG investment performance.”12 ESG indexes combined with “good practice” guidelines will not only standardize, but scale the ESG movement.

As reporting and data standards mature and achieve standardization, asset managers should invest in this space to provide the ESG considerations demanded by investors. In the next decade, the expectation from the industry is that institutional investors will be pushing ESG reporting to become part of the regulatory agenda, and that firms will be mandated to include this data in their public financial reports. Therefore, asset managers will be better positioned to face changes in reporting standards by regulatory agencies.

Large managers are putting ESG reporting into practice by reporting on performance from various sustainable investing lenses. Reporting at both a granular, securities level and an aggregated, portfolio level provides clients with a full understanding of their returns and the impact of their investing.


Active managers must react to the realities of the evolving investing landscape. Sustainable investing products and services provide asset management firms access to a previously untapped 18% of the market, equating to an over US$4t market. In order to capitalize on this ever-growing demand for ESG products, asset managers need to establish a strategy to offer clients with enhanced customization that meets their needs and objectives.

Through a holistic go-to-market offering — encompassing leadership, an ESG-focused investing strategy, tools and reporting — active managers have the opportunity to offer clients improved portfolio customization based on their preferences and can more effectively serve an industry that will only continue to evolve.


1Morningstar Direct Asset Flows Commentary: United States,” Morningstar, April 2017.

2“These Charts Show the Astounding Rise in Passive Management,” Bloomberg, December 2015. 

3“Report on UN Sustainable, Responsible and Impact Investing Trends,” US SIF, 2016.

4“The Financial and Societal Benefits of ESG Integration: Focus on Materiality,” Calvert Research and Management, 2017.

5“Asset Managers Yield to Pressure on Fees,” Institutional Investor, May 2013.

6“JPMAM creates sustainable investing team following ESG fund launch,” Investment Week, March 2017.

7“Global Indexes, Delivering the Modern Index Strategy,” MSCI, 2016.

8“Index Research Services,” Sustainalytics, 2016.

9"State Street Offers New Tool to Gauge Environmental, Other Social Risks,” Morningstar, March 2017.

10“Scotia iTRADE announces Canada's first sustainable investing tools for direct investors,” Yahoo Finance, March 2017.

11“State Street’s Center for Applied Research Reveals Industry-Wide Shift as Investors Find Sustainable Value through ESG,” State Street Newsroom, March 2017.

12“MSCI ESG Indexes,” MSCI, 2017.