Environmental, social and governance (ESG) investing has taken off in recent years with investors increasingly looking at sustainable strategies, especially in Europe.
Despite making up just a tiny proportion of the overall ETF market, ESG ETP assets increased by 29.5% in 2018, according to data from ETFGI, highlighting the monster growth in the space.
Many issuers and index providers have said investing in ESG products is an almost no-brainer as asset owners can do good while not giving up any returns.
While the jury is still out on whether this is the case, there is no doubt investors across the value change from institutional to retail are taking this area of the market very seriously.
In the build-up to ETF Stream’s ESG event on 26 November, we spoke to three fund buyers, who revealed their favourite ESG ETFs listed in Europe and the reasons why they chose that ETF in particular.
James McManus, head of ETF research at Nutmeg
The UBS MSCI ACWI Socially Responsible Hedged to GBP UCITS ETF (AWSG) provides access to large and mid-cap equities across 23 developed and 24 emerging markets that have outstanding ESG ratings whilst excluding companies that have negative social or environmental impacts. It also hedges the effect of foreign currency movements between developed markets and GBP.
The index approach this ETF employs is to firstly screen out organisations involved in undesirable activities or those that have been involved in major controversies, as defined by MSCI’s methodology, then allocate to the highest scoring or ‘best-in-class’ organisations in the remaining pool.
This achieves two things – firstly, companies engaged in controversial activities are avoided, and secondly, those that have strong sustainability profiles relative to their sector peers are rewarded (encouraging better behaviour).
The second part of this process is important – because by choosing to allocate capital in this way, you are encouraging better standards. Companies without access to capital, therefore, have to improve their standards in order to compete. It also means that in industries such as fossil fuels, you remain able to influence the behaviour of the best in class businesses by remaining an active stakeholder.
The ETF charges 0.48% per annum which is expensive in ETF terms but offers significant value for money for investors. The index is developed by utilising the depth of MSCI’s ESG research capabilities, incorporating ESG views that are created through the synthesis of vast quantities of qualitative and quantitative data, from a wide range of sources.
That means the average investor benefits from research resources typically beyond their individual means. For such a broad remit, the fund offers surprisingly reasonably liquidity costs – Nutmeg’s assets weighted spread for the ETF averages around 8bps over the previous 12 months, having traded just under £50m in total.
Dan Kemp, CIO, EMEA, at Morningstar Investment Management
My favourite ETFs at present are all in the ESG arena. This reflects the fact that I manage our ESG portfolios for UK advisers and so these holdings are always at the front of my mind.
Despite the raft of recent ESG fund launches, there remains a paucity of well-managed, low cost, single asset class funds that are actively managed.
This naturally hampers the asset allocator in an environment where we see significant valuation gaps between individual equity and bond markets. ESG ETFs have therefore become an import portfolio construction tool.
Within this group, our three largest holdings are the UBS ETF MSCI UK IMI SRI GBP ETF, the iShares MSCI USA SRI ETF USD ETF and the iShares MSCI Japan SRI ETF.
Matt Brennan, head of passive portfolios at AJ Bell
When it comes to ESG, it is a bit of minefield trying to navigate all the different indices, methodologies and products.
ESG should not just be a tag added to a product to boost sales, instead, it should be focused towards a product investing in companies that are genuinely trying to operate in a sustainable way with a view on long term profits rather than short term gains.
Therefore, the focus should not be on minimising tracking error or negative screening, instead, I look at an index that rewards companies with good practices.
My preference is the MSCI SRI range, this looks to invest in the top 25% scoring companies across each sector (after some business exclusions). I would point to the UBS MSCI World SRI ETF as a way of getting cost-effective developed equity exposure to the highest scoring ESG companies.
ETF Stream is hosting the Big Call: ESG Investors Forum event on 26 November where we will be discussing the future of ESG, implementation issues and more.
