ESG Investing

One could argue that good ESG starts at home, and not just with a product range. As demand and awareness around environmental, social and governance factors grow, ETF providers are under increasing pressure to showcase their own good practices.Fund houses will also have to become more transparent on ESG, whether they like it or not. By 2020, the European Commission will require investment houses to disclose how they integrate ESG opportunities and risks into their processes to stop funds being labelled as ESG when they normally wouldn’t qualify – otherwise called ‘greenwashing’.

It is usually the case that any innovation or evolution in the ETF industry benefits equities first. Equity ETFs have launched in every category, from the smallest corners of the globe in terms of geography to smart beta and beyond. Fixed income and other asset classes, on the other hand, always take longer to achieve the same level of progress.ESG is no exception. Data from Morningstar as of July this year shows the vast bulk of assets and number of funds relating to ESG investment in Europe is in equities. In fact, there are only eight so-called sustainable bond ETFs in the region. There are currently only three providers offering these fixed income funds – db x-trackers, iShares and UBS, and their products are mostly invested in corporate bonds.

One of the most persistent myths around ETFs that are focused on environmental, social and governance (ESG) factors is that investors will have to pay a premium for green exposure. Last time, we debunked the myth that the ‘premium’ in question would be sacrificing returns. This time, let’s look at the other more common use of the word ‘premium’ – that is annual fees.As most investors who are interested in ETFs know, there has long been a race to the bottom on annual charges. While most actively managed funds have the audacity to hover between 0.75% and 1% per year, depending on the asset class and strategy, ETFs have been falling as if there is no gravity. Investors can pick up an entire portfolio for just a couple of basis points – and as US publication ETF.com discovers every year, the price just gets lower (it hit 0.05% in 2017).

Investing with a focus on environmental, social and governance (ESG) factors has been around since the 1960s, yet almost 60 years on, myths about ESG investment abound.We are working our way through these myths. Last time, we looked at the claim that “there is no demand” for ESG – the numbers we gathered prove otherwise. Today, we’re tackling the arguably most persistent myth – that ESG investing negatively impacts performance.There is of course a degree of truth here. The majority of ESG assets are in funds that employ ‘negative screening’ or ‘negative filters’ – a basic approach that essentially removes any stock or sector that is not deemed fit for an ESG-focused fund, like tobacco or alcohol. If the removed sector performs well, the ESG fund will inevitably lag behind.

Ethical investing is most definitely in! In the last 5 years, the business of Socially Responsible Investing has seen huge growth, as investment “consumers” start to think more carefully about the effect they have on the world in a myriad of different ways, leaving fund management groups scrambling to react, (or board the bandwagon, depending on your view). There are now more than 200 funds available to UK investors, and flows via platforms (i.e. from retail investors) were up 19% in the first half of 2018, according to ESG Clarity an ethical investment-focussed website for investors. Amundi, a prominent ETF fund manager, has announced it will fully incorporate ESGinto its’ money management and voting practices by the end of 2021, with a view to influencing Corporate managements across the Globe. Pressure is mounting on fund managers as Local Authority pension schemes are being pressed to divest their…