As more firms begin to add an environmental, social and governance (ESG) element to their products, it’s necessary to exercise due diligence. This goes for both new products and adding an ESG component to existing products.
“What’s clear is that the stronger the ESG filter, the more concentrated the investment universe you have to work with,” Kilian tells Euromoney. These are the first products to look at smart beta strategies on European equities with an ESG overlay.
“Deciding on ESG criteria is always a complex discussion,” says Oliver Kilian, a director within UniCredit’s ETF Advisory & Trading unit.
What Investors Primarily Seek Funds For
Based on a survey of subscribers to Creditflux, an Acuris company, the common notion that investors primarily seek funds for performance didn’t apply to environmental, social and governance (ESG) themed investing. According to 95 survey respondents, only 13 said performance was the main driver.
According to 95 survey respondents, 35 said the primary reason ESG strategies are starting to gain traction in the capital markets is because of demand from institutional investors. In addition, about 25 percent of respondents said their organization was beginning to adopt ESG strategies to enhance their brand.
“If you have no ESG data and start with MSCI, the question is: are the types of key issues they are scoring sensible?” says Bhupinder Bahra, co-head of the quantitative research group, global fixed income, currency and commodities at JPMorgan Asset Management. “You have to look at whether the scores coming out have information content and whether they can be used to outperform benchmarks. Would you wholly rely on them? No, you wouldn’t.”
One ETF to consider is the Xtrackers MSCI USA ESG Leaders Equity ETF (NYSE Arca: USSG), which was developed in collaboration with Ilmarinen, Finland’s largest pension insurance company. The expense ratio for USSG is 0.10%, which is well below the average cost of 0.39% for ESG funds, making it ideal for investors who are also seeking a low-cost solution to add ESG to their portfolios.
While ESG ETFs are still vying for market share in the ETF space, it appears to be progressing with the advent of new products meeting demand. In fact, sustainability is one of DWS’s four core values, not only from an investment perspective but also as a financial market participant.
USSG seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI USA ESG Leaders Index. In order for companies to be included in the fund, the methodology includes a comprehensive screener that filters out alcohol, weapons, gambling, and other controversial products or activities.
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