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Research from Tabula reveals investors want ESG in passive fixed income funds

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Nearly 60 per cent of institutional investors and wealth managers across Europe, with combined assets under management of over EUR150 billion, 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 fixed income European asset manager Tabula Investment Management finds. 

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 (PAI); excluding controversial issuers more quickly; and applying stricter standards – but only as long as there is no significant impact on tracking error.

Just 7 per cent of those surveyed say passive managers should stick to tracking the index and not focus on ESG factors.   

Of the institutional investors and wealth managers surveyed almost 80 per cent 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 per cent of investors surveyed are happy to invest if the manager uses high quality data providers with robust methodologies. Almost 40 per cent 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, says: “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.” 

Michael John Lytle, Tabula CEO, says: “As a passive fixed income manager we must take a thoughtful approach to incorporating ESG data into our products. Tabula is committed to engagement and has a successful track record in lobbying index providers to improve ESG screening on core benchmarks. We are active on both climate and global standards such as the UN Global Compact and are part of collaborative initiatives such as Climate Action 100+ and Nature Action 100.”

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