ESG investing, by definition, is active investing, according to Simon Hallett, chair of the Active Managers Council's Research Committee.

If investors want to put their money where their beliefs are—and if advisors want to help them accomplish that—the management of assets focused on environmental, social and corporate government issues must be proactive, said Hallett, who also is vice chairman and partner at Harding Loevner, an asset management firm based in Bridgewater, N.J.

”Passive management has a role to play in investing, but for ESG investments, that role is very limited,” Hallett said in an interview. “A fully active approach to ESG investing allows for a nuanced consideration of a wide range of quantitative and qualitative factors, which helps advisors tailor portfolios to their clients' sustainability goals.”

The Active Managers Council of the Investment Advisor Association is an educational and advocacy group based in Washington, D.C.

Part of the need to use active investing management to help clients use their assets to further their beliefs in ESG goals is created by the fact that ESG means vastly different things to different investors, Hallett said. Because of the wide range of definitions for ESG, some indexed funds that are labeled ESG have very little in common with each other.

“ESG is a collective name for a series of opportunities and risks,” Hallett said. “There is no way those opportunities and risks can be accessed through a passive, indexed investment. Active investing to achieve ESG goals requires research on the part of the asset manager, advisor or investor.”

Even something that would seem to have a defined identity, such as green funds, can cover a lot of territory. An investor could invest in only those companies that have little or no carbon footprint or in carbon-producing companies that are working to limit emissions. Other investors might choose to invest in carbon-producing companies so they can have leverage to force the companies to change their behavior, Hallett explained.

Active management is needed to meet those different goals, he said.

“It is up to the vendor who is selling the investments to clarify for the advisor what a particular fund does and then it is up to the advisor to explain it to the investor,” Hallett added. “ESG investing is about changing the world; how to change the world is the larger question the investor has to answer.”

Maria Lernerman, ESG analyst at Harding Loevner, said in an interview that advisors who can add ESG offerings to their lineup of investment possibilities for clients are adding value to their financial planning.

“If a company says it implements ESG standards, the advisor has to determine what that means to that particular company [and] making those decisions is an active process.” Interest in this information is growing among investors, she said.

Harding Loevner looks for long-duration, growth companies. Pressure can be exerted on these companies informally, through a formal process, or through proxy votes, she added.

“Systematically evaluating the risks and opportunities associated with ESG investing assures that all relevant issues are addressed,” Lernerman said. Research into a company’s practices also can help assure more information is available and transparency is provided for investors.

Having more information means advisors and asset managers can move away from just using negative screens on clients’ portfolios to keep out some companies or industries, to being actively engaged in finding companies that have a positive impact, Vishal Hindocha, director of the Investment Solutions Group at MFS, said in an interview.

“Actively seeking companies that have a good ESG track record results in a better outcome for the world,” Hindocha said. MFS is a global investment management firm focused on impact and sustainable investing and has $700 billion in AUM.

“There is still a good amount of confusion about how to integrate ESG into a portfolio; there are a lot of different forks in the road that an investor can take,” he said. “The advisor and investor are reliant on the skill of the asset manager. This is a fast moving field and finding information can be a challenge to a retail investor.”

Because of these factors, advisors and the active asset managers can play a tremendous role for the client, Hindocha said. “ESG portfolios began with negative screening but, now, the advisor is doing a disservice to the client if he or she is only doing negative screening.”