“The increased incorporation of ESG into index portfolio construction will further mainstream ESG investing within active strategies,” SSGA said.

“This, along with the evolving understanding of fiduciary responsibility, means that active managers who do not incorporate ESG into their company due diligence and investment processes will need to explain why they don’t see ESG as a portfolio risk or investment opportunity.”

The group noted that the investment market was also likely to evolve beyond the simple ethical screenings used in the past and towards more complex types of screening that looked at multiple positive and negative factors.

“Investors have typically set a single ESG objective alongside the financial objective they wish to address in the investment process; for example, reducing exposure to a particular sector or increasing exposure to companies with high ESG scores,” SSGA said.

“But as a sign of the ESG market maturing, we are increasingly seeing the adoption of more complex ESG strategies. Investors are beginning to set multiple ESG objectives within their portfolios; for example, fully eliminating exposure to certain sectors while minimising exposure to underperforming companies and also setting broad emissions reduction targets across the portfolio.”

At the same time, the investment manager said as approaches to ethical screening matured, investors would begin to question the extent to which certain strategies were effectively screening out sectors that they did not want to support, and taking a more proactive approach to ethical investing.

“We are seeing a growing number of questions about how different screens are constructed by different [product] providers as well as the low correlation of names screened by different providers for the same topic,” SSGA said.

“Because of these differences and the increased scrutiny of all ESG investment products by both regulators and activists, in 2020 we expect it to become increasingly untenable for investors to fully outsource their exclusionary screening methodologies and keep their involvement at arm’s length.”