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Editor’s note: Passive advocates must prove they can meet the ESG test

There is an interesting battle going on in investment land.

It is not between active and passive management per se any more – I forgive you for being bored to the teeth of that debate – but on whether a new, ethical investment industry can be supported equally by both strategies.

Royal London Asset Management put its foot down a few months ago. Without active managers, its argument goes, boards have no fear of being kicked aside by investors unhappy with how they are running their firms from an environmental, social or governance standpoint.

To live up to true ESG standards, it continues, a dedicated individual needs to go into the detail and weed out not only the worst offenders, but those who are just paying lip service to investing towards a better world.

Not only that, but major index trackers will simply miss the smaller, unlisted companies with innovations that need backing to put an end to the biggest problems facing society.

But now FCA chief executive Andrew Bailey has set his own stall out. His vision for the future of the asset management world is one where passive and ethical investment work hand in hand, not against each other.

Cover story: Can passive and ESG investing co-exist?

Honestly, his speech was a bit scant on detail as to how this will actually happen, but the active world can’t deny the rise of passive ESG any more. Screens are becoming increasingly sophisticated as the volume of passive ESG products, particularly in the exchange-traded fund space, multiplies.

If you believe the arguments of their proponents, then the performance of passive ESG ETFs is running ahead of their active counterparts in much the same way as actively selected funds with ESG filters are apparently beating regular active funds with no filter.

The jury is still out but it makes the debate far more interesting. It certainly moves it forward from the well-trodden and overly-reductive question of “which is better: active or passive?”.

Yet the true test will come when passive ESG vehicles undergo the same scrutiny as those in the active space have recently, being called out for having credentials that only run skin-deep when it comes to championing green causes and diversity.

In an environment where active managers are putting more and more emphasis on being genuinely active – or “actual” investors as in Baillie Gifford’s campaign this month – they will surely pounce on any opportunity to show why exactly they are worth the price for a new age of investors that care about whose pockets their pension fees are filling.

Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1

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