The importance for companies to consider climate/ESG indexes
Investor awareness around climate risk and the financial tools available to tackle this risk (e.g. greenbonds) have grown in the past few years along with regulatory and policy pressure from the Paris Agreement.
Today, investors are asking companies to embrace the transition to a low-carbon economy, and as such they are looking for companies demonstrating how they address climate risk and what is their strategy. Henceforward, not only performance in the short term matters.
However, investors are also looking at low cost ways to manage their portfolios, that is where passive investing plays a role. Passive investing broadly refers to a buy-and-hold portfolio strategy for long-term investment horizons, with minimal trading in the market. Index investing is perhaps the most common form of passive investing, whereby investors seek to replicate and hold a broad market index or indices. In many cases investors pay annual charges of around 0.75% a year for actively managed funds. In contrast some passive funds charge less than 0.1% a year. The difference between the figures may appear small but over time their impact on your returns can be considerable. Low cost has helped index funds outperformed managed funds since their inception in 1976.
Passive investment strategies proposing pre-packaged ways to track companies, are now representing an important part of the overall investment strategy. According to a study from Russell 3000, the total value of American public equities is $31tn and the three types of computer-managed funds—index funds, etfs and quant funds—run around 35% of this.
Considering first the growing share of assets being passively managed, then the development of regulations imposing to investors to integrate environmental parameters in their investment strategies (e.g. art 173 Loi TEE - France), and finally the rising share of investors looking at hedging against climate-related financial risks, companies will definitly need to seek presence on climate/ESG indexes if they want to remain in portfolios.