FlexShares’ top-performing ETFs last week largely have one commonality: they all integrate ESG criteria into their investment strategies.
Surging commodity prices, exacerbated by Russia’s invasion of Ukraine and the ensuing halt in Russian global imports, have emphasized the need for improving the scale of clean energy sources across the globe.
“It is readily apparent that renewables will get even more attention than before. It took the shock of the current (Russian) war to finally bring the energy security issue to the forefront,” Pavel Molchanov, Raymond James energy analyst, said in a statement. “Energy security and energy transition both point in the same direction, mutually reinforcing the shift away from fossil fuels.”
Despite turbulent global equity markets, last week, the FlexShares STOXX Global ESG Select Index Fund (ESGG) surged 6.45%, the FlexShares ESG & Climate Developed Markets ex-US Core Index Fund ETF (FEDM) gained 6.44%, and the FlexShares ESG & Climate US Large Cap Core Index Fund ETF (FEUS) gained 5.91%, according to ETF Database.
ESG ETFs have largely taken off following the U.S. banning energy imports from Russia, which is expected to disrupt already-tight energy supplies and divert investment to alternative sources. Additionally, the European Union pledged earlier this month to move away from Russian natural gas, further supporting a global push to quickly transition to alternative energy.
FlexShares has a unique approach to ESG product development. The firm combines historical data analytics to understand the sustainability risks of potential constituents with forward-looking metrics to determine potential carbon-related risks. Attempting to offer a consistent measure of sustainability, FlexShares uses an ESG Vector Score developed by Northern Trust Asset Management, the investment advisor.
The ESG Vector Scores attempt to focus on the business issues most likely to impact a company’s financial performance and its returns, using a framework established by the Sustainable Accounting Standards Board (SASB) to identify issues most relevant to a sector or industry.
While SASB scoring takes a historical review on sustainability, FlexShares’ ETFs also consider how a company’s ESG risk may change in the future. The thematic framework developed by the Task Force on Climate-Related Disclosures (TDFD) was adapted by the firm to measure governance, reporting, and strategy to determine how effectively a company is managing its carbon-related risks.
ESGG has the highest expense ratio of the trio at 42 basis points, which is still considerably lower than the FactSet Segment Average of 64 basis points. FEDM and FEUS carry notably cheap expense ratios of 12 basis points and 9 basis points, respectively.
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