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Active vs passive for ESG investors

The growing popularity of ESG investing is resulting in some issuers ‘greening’ a portion of their debt stock to gain inclusion in dedicated ESG benchmarks. While passive investors lack discrimination over the underlying positions they have exposure to through these dedicated indices, their active counterparts have the chance to take a much more forward-looking approach, which brings with it the potential for superior ESG returns.

Reflecting a broader shift in society, the investment industry is showing increased interest in ESG strategies.

These approaches seek to allocate capital towards issuers which demonstrate superior performance with respect to environmental, social and governance factors, at the expense of those which perform poorly on these criteria.

This has led to the birth of new ESG-related benchmarks, which have been designed along these lines, either by eliminating issuers and certain sectors or by focusing on opportunities in areas such as green bonds. Over time, it is easy to see how changes in the relative demand for the securities of some issuers demonstrating robust ESG performance could increase to the detriment of those which do not.

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