Asset owners should have the same fundamental perspective on engagement regardless of whether an active or passive strategy is in question.
Even though passive investments aim to limit management costs, investors have a general interest to manage negative externalities (such as corruption or climate change) which could damage the economy or sector in question.
The old adage “if you can’t sell, you must care” applies. It is in the interest of passive asset holders to engage with companies about material risks and performance.
Additionally, passive investments are not necessarily blind. For example, factor investing can be considered as passive, although such investments do not follow a benchmark blindly – meaning all investment decisions are essentially active. With such strategies, consideration of specific ESG issues can and should be implemented, possibly through an ESG tilted index. The fund manager selection process should consider a manager’s approach to this.
See section on Asset Manager selection and also section on Application of ESG strategies across asset classes for a further deep dive on how ESG can be integrated in passive strategies and considered in fund manager selection.