By Clayton Fresk

Environmental, Social, and Governance (ESG) investing has become more popular in recent years.

While not a new phenomenon within the institutional space, the popularity of ESG investing in ETF land is increasing. While the number of both broad and more niche ESG-type ETFs keep increasing, AUM in two of the original ESG-type ETF is nearing a combined $1 billion dollars:

  • DSI – iShares MSCI KLD 400 Social: $578.2 million
  • KLD – iShares USA ESG Select: $409.2 million

I will not go into the benefits of ESG investing, whether qualitative or quantitative, as there are numerous sources available that can further delve into this issue!

Up to now, the broader ESG ETFs had a primarily US focus. However, recently there have been a few new ETFs that focus on the international markets. In the following, I will examine these new broad-based international ESG ETFs

Developed

In the developed market space, there are two new ETFs offering broad ESG exposure. Here is a table with some characteristics:

While the iShares offering focuses solely on EAFE exposure, FlexShares is Global so it will include US exposure (about 56.5% at month end).

Starting with the FlexShares offering, you can see there is a rather large amount of (positive) performance differential between its index and its base index. Here is a description of the ESG filter applied to the base index (via the FlexShares site):

The STOXX® Global ESG Impact Index offers exposure to a set of global, developed-market companies that is tilted towards companies scoring better with respect to a select set of environmental, social, and governance (ESG) key performance indicators (KPIs). Eligible securities are selected from the STOXX Global 1800 Index. The bottom 50% of such companies based on their ESG KPI scores are excluded from the Index, as are companies that do not adhere to the UN Global compact principles, are involved in controversial weapons or are coal miners (ICB Subsector 1771). Components are then weighted by free-float market cap combined with a cap factor that is based on a company’s aggregate ESG KPI score. Component weightings may also be adjusted to ensure that the weight representation of each country in the Underlying Index does not vary from that in the STOXX Global 1800 Index by more than +/-1 percentage point and that the weight of a single company is less than 5% at time of each index rebalancing or reconstitution.

As you can see, the index rules are a bit exclusionary, with over 50% of the base index names being eliminated through low scores and other criteria.  This could lead to some idiosyncratic risk, but the other index rules in place should mitigate some of these concerns.

SEE MORE: Digging into Two Thematic Health ETFs

Moving onto the iShares offering, you can see the performance differential is much smaller, although still positive on the periods analyzed. An index description from MSCI (which applies to both EAFE and Emerging Markets, which I will touch on later) sounds somewhat similar to that of the STOXX index mentioned above:

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