The number of Environment, Social & Governance (ESG) ETFs on the London Stock Exchange has boomed in the past year indicating a trend towards incorporating this strategy. But what benefit does ESG add, is it necessary in a portfolio and if so, how do you choose the best ones?
When we published an overview of ESG last November there were only 23 ETFs (now 35) on the exchange and we focused on how much ESG boosted returns. One of the biggest criticisms of ESG is that historically it reduces returns. The conclusion was that ESG is a long-term play.
One of the oldest ETFs on the exchange is the iShares' MSCI Europe SRI UCITS ETF (IESG) which launched in February 2011. Its one year return is 1.89%, its three year return is 12.76% and five-year 7.34%. (Its five year performance is shown in the graph below)
Source: Bloomberg
The most recent consensus seems to be that sustainable investing is not just a trend, but instead is becoming normalised as part of investing.
iShares put a report out earlier this year that found sustainable investing is no longer a niche area, it reported: "We are seeing a surge in clients' and portfolio managers' interest in incorporating sustainability-related insights into their investments. This demand looks poised to accelerate — driven by societal and demographic changes, increased regulation and government focus, and greater investment conviction."
Index provider, Solactive who put out a range of ESG indices this year, said at the time that "It is going to dominate contemporary investors decision on financial strategies for the future to come."
Last year ESG ETFs saw total assets invested around the world rising nearly 30%, attracting $7.61bn in net new assets. At the end of December 2018, there were 208 ESG classified ETFs/ETPs, with 492 listings, assets of $22.47 Bn, from 61 providers listed on 26 exchanges in 23 countries.
However, performance over the past year still isn't as good as one might hope.
Three ESG ETFs on offer IESG (black), Lyxor's MSCI EMU ESG Trend Leaders DR UCITS ETF (EESG) (orange) and Xtrackers ESG MSCI World UCITS ETF (ZXWO) (purple), have not performed well.
Source: Bloomberg
Also, inflows in December last year decreased 3.20% from the prior month to $679m.
But interest is growing.
According to iShares, they are seeing greater interest from their clients in sustainable investing. "Investors want deeper knowledge about the field, more sustainable investing options, enhanced data and reporting on impact, and increased commitment from asset managers to integrate sustainability into investment processes. Millennials, in particular, look set to propel the future of sustainable investing. This group of future financial decision-makers is asking more of companies. And regulators are expanding their focus on incorporating sustainability into investment information and decision making."
What is also apparent is that ESG factors can often tie in with a company's long-term growth potential. Access is now easier than it has been historically.
For example, BlackRock and JP Morgan launched ESG fixed income ETFs only last year. These have performed particularly well over the last three months with the iShares JP Morgan ESG USD EM Bond ETF (EMES) returning 5.32%.
Another ETF doing particularly well over the past three months is the Lyxor MSCI EM ESG Trend Leaders UCITS ETF (MESG), which has returned 8.21%. It launched in May last year.
With the advent of easier access and more options to choose from, it is a sector that is clearly evolving to match demand.
Below is a list of ESG & SRI ETFs available on the LSE.
SAJP
SDJP
SDUS
SASU
EMES
EMSA
SDUE
SAEU
SMUD
SAWD
SDWD
SAUM
5HEP
5HED
IESG
MESG
UESG
WESG
XZMU
XZMJ
XZWo
XZEU
EESG
OWLP
OWLU
JREG
JREU
JREM
JGRE
JURE
JERE
JMRE
ETF3M RTNTERINDEXiShares MSCI Japan ESG Screened UCITS ETF-0.13%0.2%MSCI Japan ESG Screened IndexiShares MSCI Japan ESG Screened UCITS ETF-0.13%0.2%MSCI Japan ESG Screened IndexiShares MSCI USA ESG Screened UCITS ETF0.44%0.2%MSCI USA ESG Screened IndexiShares MSCI USA ESG Screened UCITS ETF0.51%0.2%MSCI USA ESG Screened IndexiShares JP Morgan ESG USD EM Bond UCITS ETF5.32%0.45%JP Morgan ESG EMBI Global Diversified indexiShares JP Morgan ESG USD EM Bond UCITS ETF5.31%0.45%JP Morgan ESG EMBI Global Diversified indexiShares MSCI Europe ESG Screened UCITS ETF1.18%0.12%MSCI Europe ESG Screened IndexiShares MSCI Europe ESG Screened UCITS ETF1.18%0.12%MSCI Europe ESG Screened IndexiShares MSCI EMU ESG Screened UCITS ETF0.20%0.12%MSCI EMU ESG Screened IndexiShares MSCI World ESG Screened UCITS ETF1.27%0.20%MSCI World ESG Screened IndexiShares MSCI World ESG Screened UCITS ETF1.24%0.20%MSCI World ESG Screened IndexiShares MSCI EMU ESG Screened UCITS ETF0.21%0.12%MSCI EMU ESG Screened IndexOssiam ESG Low Carbon Shiller Barclays Cape US Sector UCITS ETF2.81%0.85%Shiller Barclays CAPE US Sector Value Net TR IndexOssiam ESG Low Carbon Shiller Barclays Cape US Sector UCITS ETF2.17%0.85%Shiller Barclays CAPE US Sector Value Net TR IndexiShares MSCI Europe SRI UCITS ETF2.56%0.30%MSCI Europe SRI IndexLyxor MSCI EM ESG Trend Leaders UCITS ETF8.21%0.30%MSCI EM Select ESG Rating and Trend Leaders Net Return USD IndexLyxor MSCI USA ESG Trend Leaders DR UCITS ETF1.96%0.25%MSCI USA Select ESG Rating and Trend Leaders Net Return USD IndexLyxor MSCI World ESG Trend Leaders DR UCITS ETF1.76%0.30%MSCI World Select ESG Rating and Trend Leaders Net Return USD IndexXtrackers ESG MSCI USA UCITS ETF2.14%0.20%MSCI USA ESG Leaders Low Carbon Ex Tobacco Involvement 5% IndexXtrackers ESG MSCI Japan UCITS ETF1.86%0.30%MSCI Japan ESG Leaders Low Carbon Ex Tobacco Involvement 5% IndexXtrackers ESG MSCI World UCITS ETF1.86%0.30%MSCI World ESG Lea Leaders Low Carbon Ex Tobacco Involvement 5% IndexXtrackers ESG MSCI Europe UCITS ETF1.67%0.30%MSCI Europe ESG Leaders Low Carbon Ex Tobacco Involvement 5% IndexLyxor MSCI EMU ESG Trend Leaders DR UCITS ETF0.91%0.20%MSCI EMU Select ESG Rating and Trend Leaders Net Return EUR IndexOssiam World Esg Machine Learning UCITS ETFThe objective of the Fund is to deliver the net total returns of a selection of equities from developed marketsOssiam World Esg Machine Learning UCITS ETFThe objective of the Fund is to deliver the net total returns of a selection of equities from developed marketsJPMorgan Global Research Enhanced Index Equity ESG UCITS ETF1.30%0.25%The objective of the Sub-Fund is to achieve a long-term return in excess of the Benchmark by actively investing primarily in a portfolio of large- and mid-cap companies, in developed markets globally.JPMorgan US Research Enhanced Index Equity ESG UCITS ETF1.07%0.25%The objective of the Sub-Fund is to achieve a long-term return in excess of the Benchmark by actively investing primarily in a portfolio of large cap US companies. The Sub-Fund will seek to outperform the Benchmark over the long-termJPMorgan Global Emerging Markets Research Enhanced Index Equity ESG UCITS ETF0.30%The Benchmark consists of largeand mid-capitalisation stocks issued by issuers in Emerging Markets globallyJPMorgan Global Research Enhanced Index Equity ESG UCITS ETF1.94%0.25%The Benchmark by actively investing primarily in a portfolio of large- and mid-cap companies, in developed markets globallyJPMorgan US Research Enhanced Index Equity ESG UCITS ETF-0.32%0.25%JPMorgan Europe Research Enhanced Index Equity ESG UCITS ETF1.73%0.25%The objective of the Sub-Fund is to achieve a long-term return in excess of the Benchmark by actively investing primarily in a portfolio of large cap US companies. The Sub-Fund will seek to outperform the Benchmark over the long-termJPMorgan Global Emerging Markets Research Enhanced Index Equity ESG UCITS ETF0.3%The Benchmark consists of largeand mid-capitalisation stocks issued by issuers in Emerging Markets globally
