Discover the most popular products and how they play the ESG theme

Investors’ capital flooded into environmental, social and governance (ESG) exchange-traded funds (ETFs) at the start of the year. Total assets globally reached a record $25bn at the end of January, a 10% increase in just a month, according to data from research provider ETFGI.

There are 210 ESG ETFs listed globally, and the top 20 took nearly $900m in net new assets in January. Among the top five most popular globally at the start of the year were a mix of socially responsible investing (SRI) and ESG funds covering broad geographical regions, plus a fund based on religious values.


Of the London-listed top five by net new assets, the most popular was iShares MSCI Europe SRI UCITS ETF (IESE), taking a net $70m in January.

It aims to track the performance of the MSCI Europe SRI Index, which includes large and mid-cap stocks from 15 developed markets in Europe, counting Roche, Total, SAP and Allianz among its top 10 holdings.

Its approach is a mix of best-in-class selection of firms with outstanding ESG ratings, and values-based exclusions of companies with a negative social or environmental impact. It has an ongoing charge of 0.3% and has achieved 7.07% annualised returns over the past five years, according to Morningstar.


The other bestselling European fund is iShares MSCI Europe ESG Screened UCITS ETF (SAEU), a relatively new product which tracks the MSCI Europe ESG Screened Index, based on the MSCI Europe universe.

It uses only negative screening to exclude stocks from controversial industries such as nuclear and tobacco. Top 10 holdings include Nestle, Roche, HSBC (HSBA) and BP (BP.), and it has an expense ratio of 0.12% and has returned 13.2% so far this year (to 11 June).

The US-focused product in the top five, iShares MSCI USA SRI UCITS ETF (SUAS), launched in 2016. It tracks the MSCI USA SRI index, designed to capture those companies best at managing ESG risks and opportunities. Its largest positions include Microsoft, Proctor & Gamble, Walt Disney and Home Depot. It has returned 17% so far this year (to 11 June) and costs 0.3%.


There are two emerging market ETFs completing the top five. One is iShares JP Morgan ESG USD EM Bond UCITS ETF (EMSA), which launched last year. It invests in sovereign and quasi-sovereign debt from emerging markets governments that pass its ESG screening.

It tracks the JP Morgan ESG EMBI Global Diversified index, and excludes controversial sectors such as thermal coal, tobacco, weapons and any violator of the UN Global Compact principles.

The ETF gives exposure to more than 300 bonds with at least 2.5 years maturity, issued by countries including Uruguay, Poland and Peru. It has returned 6% year to date with an expense ratio of 0.45%.

The emerging markets equity product is iShares MSCI EM SRI UCITS ETF (SUES) which tracks the MSCI Emerging Markets SRI index. It comprises large and mid-cap stocks from 24 emerging markets countries, including those with outstanding ESG ratings and excluding those with negative social and environmental activities.

Holdings include Taiwan Semiconductor, Infosys, Banco Bradesco and Tata. The ETF has delivered 1% year-to-date with an expense ratio of 0.35%.


Damien Lardoux, head of impact investing at EQ Investors, says it’s no surprise these products are growing in popularity, as ESG investing is known to have the ability to improve returns.

‘The reason ESG has become such a topic across the industry is because there are hundreds of studies that have shown, by implementing ESG factors into your process, you can reduce your downside risk and enhance returns,’ he says.

The inflows also reflect investors’ desire to hold companies to account and the evolution of the ETF market to offer more complicated products, says Hector McNeil, co-CEO at independent ETF platform HANetf. ‘The industry is a bit of a smorgasbord because one person’s moral or ethical stance will be different for someone else, so trying to capture some sort of commonality is difficult.’

He predicts there will be many more ESG-focused ETFs coming to the market in the future, and artificial intelligence will allow much more granular and accurate screening of stocks. ‘We’re only scratching the surface, it is going to get much more important and I think you’ll see ESG versions of all the common themes in the investment world, whether equity income or commodities or factor indices.’


So are these products a good option for DIY investors wanting to bring an element of ESG investing to their portfolios? ‘Yes I think they are,’ says McNeil. ‘What affects returns is largely price and having that ESG sleeve [available on ETFs] is important because it allows investors to keep a sub-50 basis point portfolio.’

Lardoux adds: ‘For your general investor, it makes sense to use those ETFs.’ He says price is important, but he thinks the slightly more expensive SRI products are worth the extra cost versus the ESG-screen-only ones which are ‘quite old school’. For example, the non-SRI version of the MSCI Europe fund costs 12 basis points, compared to 30 basis points for the SRI version. ‘It’s a bit more expensive, but still you could argue relatively cheap.’

In this growing investment universe, what’s the starting point for investors wanting to dip a toe? They should do their research, read factsheets and methodologies to see exactly what a particular ETF does and how it screens stocks, concludes Lardoux.

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