Fund Solutions

Actively-Managed ESG ETFs Offer “Credible” Opportunities

Competitive pricing, broad exposure and increased control for the fund manager may make hybrid ETFs more viable for ESG investing. 

Actively-managed and semi-transparent ESG exchange-traded funds (ETFs) can overcome investors’ traditional reservations over using passive vehicles to manage ESG risks, according to experts speaking at a webinar hosted by Brown Brothers Harriman (BBH) yesterday.

For investors looking to manage ESG risks, ESG ETFs are a stepping off point, offering broad exposure to a variety of sectors, with typical offerings automatically excluding carbon-intensive corporates, such as oil and gas majors.

However, with investors being encouraged to take a more active role in transitioning their portfolios to a greener economy, a passive investment vehicle doesn’t seem like an automatic fit. Vendors have responded with the introduction of more actively-managed alternatives.

“We’re in a place where we can offer investors a credible portfolio that they can build using active ESG ETFs,” said John Harrington, Head of International ETF Product at JP Morgan Asset Management.

Actively-managed and semi-transparent ESG ETFs allow portfolio managers “more control” over the holdings within the vehicle, meaning it’s less faithful to the index or fund being tracked, explained Jordan Farris, Head of ETF Product Development at Nuveen.

For example, if an ESG ETF is tracking the FTSE 100 index, investing only in the holdings it considers to have positive social or environmental impact, the fund manager of an active ETF is able to quickly divest if a corporate is revealed to have missed its decarbonisation target or committed a human rights violation.

The increased liquidity of an ETF over a traditional fund means the investor can hold that corporate almost immediately accountable, rather than waiting for quarterly reports or the annual general meeting.

Similarly, if a previously excluded FTSE 100 constituent unveils a positive energy transition plan, it could be swapped in.
This also allows the portfolio manager to take short-term investment positions that drive financial and sustainable performance for the investor, with less risk exposure in volatile markets compared to a mutual fund, Farris said.

In Q1 2020, Morningstar analysis highlighted that ESG ETFs outperformed traditional ETFs across three out of four investment categories, despite the market volatility caused by the pandemic.

Growing in popularity

Investors have an increasing appetite for ESG ETFs, as proven with the biggest ETF launch in history by BlackRock last week, worth US$1.25 billion.

The US Carbon Transition Readiness ETF (LCTU) is actively managed and will invest in Russell 1000 companies well-positioned for the energy transition.

The world’s biggest asset manager has other ESG ETFs that are driving positive returns for investors.

BlackRock’s iShares ESG Aware MSCI USA ETF, with US$16.3 billion in AUM, has been trading at an all-time high, returning more than 50% in the past 12 months, according to Bloomberg.

This follows a recent report published by BBH, which highlighted the growing interest in actively-managed and semi-transparent ESG ETFs from investors.

Of the 380 respondents to a survey, 67% of European institutional and wholesale investors intend to increase their exposure to ESG ETFs over the next 12 months, as well as 80% of US investors and 92% of investors based in Greater China.

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