ESG has risen to the center stage in recent years, influencing investors’ allocation decisions and impacting both advisors and issuers.
Nearly 80% of investors agreed that how a company manages ESG risks and opportunities was an important factor in investment decision-making, according to the December 2021 PwC Global Investor Survey. In addition, three out of four consider a company’s exposure to ESG risks and opportunities when screening potential investment opportunities, according to the survey.
Simultaneously, product development in the ESG space has been rampant. Nearly two-thirds of the 134 U.S.-domiciled broad ESG equity and fixed income ETFs rated by CFRA have less than a three-year track record, according to Todd Rosenbluth, head of ETF & mutual fund research.
However, when it comes to ESG, investors should look beyond past performance and not rule out younger funds. Out of the 134 broad ESG funds rated, there were 86 such ESG ETFs (64%) that were star rated by CFRA with less than a three-year record and 45 (36%) with less than a one-year record, according to Rosenbluth.
The FlexShares ESG & Climate U.S. Large Cap Core Index Fund (FEUS) and the FlexShares ESG & Climate High Yield Corporate Core Index Fund (FEHY), both launched in September 2021, recently received the accolade of a favorable rating by CFRA.
FlexShares 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, according to Rosenbluth.
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, according to Rosenbluth.
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, according to Rosenbluth.
FEUS and FEHY carry expense ratios of 9 basis points and 23 basis points, respectively — well below the funds’ category peers’ average expense ratio.
FEUS is diversified across 204 holdings. 30.8% of the strategy’s assets were concentrated in the top 10 fund holdings, compared to the category’s 49.5% average, as of the end of January, according to Morningstar.
FEHY’s average surveyed credit quality is on par with peers, both the fund and the average being rated B, according to Morningstar.
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