Passive ESG investing is on the rise, as is the debate on the effectiveness of passive vs. active ESG funds, according to a paper released Tuesday by the US SIF Foundation.
According the paper, The Rise of ESG in Passive Investments, index-based funds with ESG considerations have grown in both number and assets, although they are still vastly outnumbered by actively managed ESG funds.
The report cited Morningstar data showing that during four of the past five years, net flows into passive ESG funds outpaced those into active ones. Last year, for example, passive flows totaled $12.7 billion, compared to $8.7 billion for active ESG funds.
The first ESG index, called the Domini 400 Social index and now known as the MSCI KLD 400 Social index, was developed in 1990 by KLD Research & Analytics. Today, there are more than 1,000 ESG indexes, and their creation and growth can be attributed to the rising popularity of sustainable investing, the report said.
The report also examined critiques of passive funds — with feedback from asset managers of those funds — and offers recommended best practices for passive fund asset managers to deepen ESG approaches and impact, including through proxy voting, company engagement, disclosure about their ESG incorporation techniques, impact measurement and field building.
The increase in passive ESG funds "provides more options to investors seeking sustainable impact," Meg Voorhes, director of research for the US SIF Foundation, said in a statement. "And we encourage these fund managers to make commitments to comprehensive ESG approaches."