Is the market about to sort?

13 MAR 2025

@alexblock

The anti-ESG backlash could have an unexpected upside for European index fund managers

At the end of February the People’s Pension, one of the UK’s largest pension schemes for auto-enrolled members, announced that they were moving £28bn of assets to Amundi and Invesco. This represents the vast majority of their £32bn of assets. The announcement explained that: “Both appointments represent a step forward in achieving greater alignment with The People’s Pension’s stewardship approach and priorities and will allow it to continue to evolve these high standards.”

It took the press about five minutes to figure out where the assets had been taken from: US index fund manager State Street. The announcement came almost exactly a year after State Street left Climate Action 100+ and just a few days before the originator of the Fearless Girl campaign dropped their board diversity targets.

Clearly this was a decision that would have been at least a year in the making, as People’s Pension CIO Dan Mikulskis explained on a recent podcast. However, the timing is particularly striking given the recent row-back from climate and DEI commitments by US firms.

Time to sort this out?

Is this the start of something bigger? I have wondered for a while whether the market will sort on sustainability factors. Jonathon Zytnick at Georgetown has found that mutual fund voting patterns don’t reflect their individual clients’ ideological preferences. Pass-through voting has emerged in response to the concern that the same might be true for institutional investors.

Asset owners have formed relationships with asset managers over decades based on a whole slew of factors including cost, fund range, service quality, administrative and other ancillary services and so on. Then in recent years ESG considerations have come more to the fore. For a while the whole asset management industry seemed to be travelling in the same direction, with commitments to various ESG coalitions and initiatives being the rule rather than the exception. Asset managers developed ESG strategies that did enough to satisfy asset owners that it wasn’t worth disrupting a wider relationship to feel better about their sustainability approach.

But there have been three important developments.

First, the extent of the pull-back from ESG-related commitments amongst US firms, especially on climate but also DEI, has jarred with those asset owners for whom these issues remain important part of a prudent investment approach; especially, but not only, in Europe. These asset owners want their asset managers to use engagement to further ESG objectives that they view as part of good risk management. Many also want the engagement issues addressed to incorporate a double-materiality approach. US firms are less and less willing to do this. It is no longer possible to pretend that there isn’t much difference between firms. (Although the recent SEC guidance making ESG engagement harder for all firms may level the playing field somewhat.)

Second, the stark differences on display between US and European firms (a sweeping generalisation, but not an entirely unfair one, especially when looking at the big index managers on either side of the Atlantic) is causing asset owners to question how effective the engagement can be for sustainability strategies within firms that are otherwise broadly sceptical on ESG. How much influence will the head of ESG for the sustainability strategy really have in the engagement meetings if they are pressing issues that are not part of the firmwide engagement policy? How much air time, and support, will they really get?

Third, asset owners are increasingly aware of the limitations of their ability to impact climate change or nature loss through asset allocation and engagement. Instead they are placing greater weight on policy engagement and collective influence through alliances in an attempt to change the overall rules of the system. This type of system engagement is something that can only happen at the firm level, not the fund level. So for this form of stewardship, the overall sustainability stance of the asset manager matters a lot.

How far will it go?

It’s hard to know whether this will be a trickle or a flood. But it seems clear that index strategies are most vulnerable to these shifting tides. Given the broad fungibility and increasing price competitiveness it seems quite plausible that the desire to achieve alignment on stewardship policy becomes a defining selection factor for quite a few asset owners as they choose their index fund managers. For specialist strategies, it’s more likely that other factors relating to the quality of the core investment proposition will win out. So in broad terms it’s the large European index managers that seem most likely to benefit if this becomes a trend.

Will it? Inertia is a powerful force. But the power of example can be significant too. The decision made by the People’s Pension has come at an awkward time for the US index fund providers, who have become used to getting pretty much their own way in markets around the world. It will make such a switch seem more possible for other asset owners than was the case a month ago.

Some market sorting seems inevitable. Asset managers have been trying to be all things to all people on sustainability and at times it’s painful to watch the contortions. So it’s probably not a bad thing if asset managers are forced to set out their approach and convictions on sustainability and let their clients choose. If clients move on, there are always plenty more fish in the sea.

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