The Case for Active Management in the Fluid World of ESG

The First Trust TCW ESG Premier Equity ETF (NYSEArca: EPRE) debuted last week, adding to the burgeoning field of exchange traded funds adhering to environmental, social, and governance (ESG) investing principles.

In itself, the debut of a new ETF, regardless of issuer or underlying investment objective, usually isn’t remarkable. However, there may be something to see with EPRE because the marriage of active management and ESG could prove powerful. TCW Investment Management Company is the portfolio manager for the fund.

One reason active managers can add value with ESG investment choices is that although the asset class is rapidly growing and evolving, there’s still ample fluidity in scoring as well as confusion regarding exactly what constitutes ESG. A 2018 study by Allianz Global Investors indicated 60% of respondents were concerned about the wide variety of approaches to ESG investing and the lack of standardized ratings.

With First Trust’s new EPRE, TCW assesses companies based on environmental impact, how they improve social impact, and how management teams drive positive change.

Those concepts intersect because environmentally conscious companies can avert negative press and costly legal proceedings, and that stewardship can be a sign of a well-governed operation. Likewise, companies prioritizing social concepts can be more innovative, nimble, and score better when it comes to retaining and motivating employees. Plenty of passive ESG funds scratch the surface of those concepts, but many lack the depth offered by First Trust’s new fund.

“One of the reasons why ESG investing is only possible with actively managed funds, many wealth managers argue, is because of the absence of well-established, easily verifiable ESG indices,” according to Raconteur.

EPRE has other benefits with direct investment implications. Not only does TCW search for stocks trading below intrinsic value to include in the new ETF’s portfolios, the sub-advisor prioritizes free cash flow generation and deep competitive advantages.

EPRE currently has 20 holdings, with one of the more familiar being Microsoft (NASDAQ: MSFT). Interestingly, three of the ETF’s other holdings are providers of indices for use by passive funds. Those holdings are IHS Markit (NASDAQ: INFO), Morningstar (NASDAQ: MORN) and MSCI (NYSE: MSCI).

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.