Olivier Jaeggi, managing director and chairman of ECOFACT AG, has called on investors to take action themselves rather than waiting for index providers to remove controversial weapons from their indices entirely.
Speaking at STOXX’s Innovate2Invest 2019 conference, Jaeggi (pictured) said institutional investors wanted to avoid making the decision themselves and instead, pass the issue onto the index providers.
His comments come after over 140 institutional investors, managing $6.8trn assets, including Pictet Asset Management, Man Group and Lombard Odier, signed a letter calling on global index providers to exclude controversial weapons from their mainstream indices “in order to align their products with what has become standard practice or expectation among investors”.
The letter said: “We strongly believe that – in line with international conventions, investor practices and public opinion – the default position should be to exclude controversial weapons from active and passive investments.
“We therefore call upon index providers to remove companies involved in controversial weapons from mainstream indices, and to engage in dialogue with asset owners and asset managers on using these indices for benchmarking and investment solutions.”
Index providers have since responded to the letter with S&P Dow Jones Indices stating: “Our indices address the needs of a diverse universe of market participants and no particular index is a ‘one-size-fits-all’ solution to investing or benchmarking.”
Meanwhile, Roberto Lazzarotto, global head of sales at STOXX, said the firm was waiting for a consensus view on the issue before making any decision.
“There needs to be a consensus among investors on the criteria’s for exclusion. From an index provider perspective, it is difficult to be the ruler or the judge as you inevitably end up frustrating 50% of the industry if you go one way or the other.”
Jaeggi said the reason why investors wanted to pass on the decision to the index providers was because it would enable them to save costs, not increase tracking by removing these products individually and it becomes easy to implement through passive mandates.
“If controversial weapons are automatically excluded then institutional investors do not need to worry about these factors as the burden is not on them.”
However, the ECOFACT managing director argued the burden should be on the investors, and not just on the index provider.
"Institutional investors need to think about environmental and human rights due diligence and cannot wait for index providers.
"There is already specific guidance for institutional investors on due diligence around human rights issues," he continued. "They are not yet legally binding but, they are government-backed recommendations. Ignoring them is a risky option."