Classifying what is an environmental, social or sustainable investment is difficult enough. But creating an exchange traded fund (ETF) that offers socially responsible assets can be an even more daunting task due to the variety of definitions that exist.
The focus at the moment is on finding the largest common denominator among what clients want and creating a strategy that would cover their needs, says Blanca Koenig, a director of the passive product team at Deutsche Asset Management.
The firm is actively looking to launch more ETFs in this universe, but concrete plans of what the next mandate will be are not yet in place.
‘I would expect ESG ETFs to pick up a lot more going forward. I think this is just the start and clients are still educating themselves. The industry itself is still finding out what clients expect from ESG.’
Although demand to date has mainly come from institutional investors, the wider public has started showing noticeable interest in passive sustainable investment. But different investors have different interpretations of ESG: some concentrate on the green side, some on governance, while others want a more holistic approach.
According to data gathered by ETFGI, an independent research and consultancy firm, the number of ESG ETFs and exchange traded products (ETP) in Europe and America has nearly doubled in the past four years.
From 169 ETFS and ETPS in 2013, Europe now has 260, while America has gone from 22 to 52 in the same time.
ETF.com counts some 50 MSCI US-traded ESG ETFs and Morningstar found there are 36 socially responsible ETFs listed in Europe.
Such discrepancies, says Howard Li, an executive director at ETF Securities, are due to different methodologies of enumeration and the fact that some organisations or researchers might ignore certain mandates such as in-house socially responsible investment (SRI) ETFs.
Firms say that the rising interest in the market, coupled with solid returns, has helped make the internal shift towards sustainability more visible.
UBS, the biggest provider of sustainable ETFs, now has a selection of 20 such products, mainly on the equities side, based on MSCI indices.
Andrew Walsh, the firm’s head of passive and ETF specialist sales for UK and Ireland , says that although the concept has been around for a long time, even as recently as four years ago, SRI was an esoteric concept with pretty small assets that left investors uninterested.
‘We have an increasing number of wealth management companies who might have some ethical offering for their charity clients and find these products a nice complement to the existing range they can chose from,’ he said.
‘But there are others who like how the methodology works and ask for it to be implemented in other fields. We also offer the SRI ETFs with embedded currency hedging.’
BlackRock is following the trend. Out of its 10 ESG ETFs, which have a combined $2.1 billion (£1.58 billion) in assets, half were launched in 2016 and 2017.
Like many of its peers, the firm attributes the rising prominence of ESG to factors including regulatory requirements, demographic shifts towards women and millennials, greater awareness of global risks such as climate change, and a recognition that SRI does not have to mean forfeiting returns.
‘We consistently hear from our clients that they are looking more closely at improving the ESG and carbon profile of their investments, which they acknowledge helps manage risk in their portfolios,’ BlackRock said.
Elsewhere, Deutsche Bank launched its first sustainable ETF in February this year—a fixed income tracker based on the Barclays MSCI sustainability SRI index. This follows a strict exclusion methodology, screening out any bond issuers who do not meet certain ESG criteria.
Koening says its €20 million (£17.7 million) in assets under management are expected to grow in the coming months.
Europe seems to be robust in the space. Li says that Scandinavian countries and the Netherlands in particular, but also other places, such as the UK and Germany, show boosted demand for capital with a conscience.
‘The US is rising, but not as strong as the European region. And now that US president [Donald] Trump has withdrew the country form the Paris agreement I cannot see it progressing any faster. ESG will be going stronger for sure. As long as you have the data and the information, I predict ESG ETFs will become a lot more mainstream.’
But as clients unavoidably become more knowledgeable, firms could have an extra task—they will have to look at the policies and ESG approaches of the names that form portfolios and indexes and be ready to justify their choices.
‘In the future investors will be asking “why”,’ Li said. ‘And they will expect to be given an answer.’