Fund providers have an almost miraculous ability to create products that follow the news cycle. Index-linked funds (due to worries around inflation), robots and automation (robots taking over our jobs) and gender diversity ETFs (tapping in to Sheryl Sandberg’s ‘Lean In’ revolution). Gender diversity, hopefully, will be a lasting focus for investors, while internet-focused funds, which launched in the 1990s and early 2000s, had a seriously rocky start.
No matter an investor’s principles and good intentions, ESG is prone to the same marketing whims and opportunism of fund providers as much as any other investment sector. And just like any other sector, ESG funds are also at risk of being overpriced, especially if a fund provider claims to launch a ‘first of its kind’ and therefore has no competition. ESG or not, a fund provider is a business, and its main aim is to profit.
A case in point is the Vegan Climate ETF (ticker VEGN), a US-listed fund which launched this year and claims to invest in companies that share values with the vegan community. For example, it invests in a protein-substitute company called Beyond Meat. But look closely and you might wonder what is so vegan-friendly about investing in almost 500 of the largest companies in the US by market capitalisation. This methodology means the fund is stocked with large tech stocks like Apple and Facebook – and the annual fee is 0.60%.
The VEGN ETF might do well – no one has a crystal ball. But arguably, investors might be better off paying less for an ESG version of the S&P 500.
But to dismiss ESG products overall as a fad would be underestimating the rising demand and long-term need for such products.
Firstly, a fad is called a fad for a reason – because it tends to come and go. Morningstar found late last year that 35% of thematic ETFs launched in Europe had already closed, and this rises to 80% for those that launched before 2012.
These figures hardly inspire much confidence for investors who have caved into more recent trends, such as automation and robotics – which account for the vast majority of assets poured into thematic ETFs in recent years. In fact, Morningstar found there were 5.25 billion euros in technology thematic funds as of September 2018.
What can inspire confidence, however, is that some environmental-focused ETFs are the longest standing thematic ETFs in Europe, as well as being the second most popular group out of three types of thematic ETFs that Morningstar identified, claiming 1.27 bn euros. These assets tend to be invested in natural resources i.e. focusing on the shortage of water around the world. A lack of water, unfortunately, is not going to be solved any time soon. Neither is gender equality, or the increasingly stricter standards around companies’ corporate governance and their carbon footprint. Therefore, investors are being presented with relevant and long-term opportunities to both aid and benefit from ESG concerns.
While recognising the importance of responsible investing, and satisfying customer demand, an ESG label does not provide us or anyone else with an excuse to not do our due diligence. That includes looking at price, how the fund is seeded, its track record, the methodology and construction of the index, its distribution channels and documentation. We look under the bonnet of an ESG ETF, in other words, just as we would with any other fund.