Monster ETF debut hints at hope for slow-growing ESG space

A massive record of first-day inflows signals increased acceptance of values-based funds

Monster ETF debut hints at hope for slow-growing ESG space

Conservation has been a hot topic of conversation among investors and fund providers for years, though multiple hurdles have held it back from the investment mainstream. But a recent development in the US suggests change is just around the corner.

DWS Group, the asset-management business of Deutsche Bank, recently managed to raise US$843 million within one day for a fund that seeks to invest in the best corporate citizens in the US. That has put it among the most successful ETF debuts of all time, according to the Wall Street Journal.

“ESG is a contemporary offshoot of socially responsible investing,” the Journal said. While older strategies would categorically ban unloved industries, ESG tries to find the best-performing companies on issues like pollution and pay parity.

“To us, ESG is part of good portfolio management,” Anna Hyrske, head of responsible investment for Ilmarinen, told the Journal. Finland’s largest pension-insurance company, Ilmarinen is the big investor behind Deutsche Bank’s new Xtrackers ETF. “We are here to make money. We’re not tree-huggers.”

Underpinning the new ETF is the MSCI ESG Leaders Index, which picks the best-scoring companies according to MSCI’s sustainability ratings. The scores are based on non-financial information — news stories, financial records, company reports, and regulatory filings — that MSCI analysts scour and tag for red flags that might get overlooked in a traditional analysis.

“One of the reasons we like the MSCI ESG Leaders index is that it’s best in class, and the companies that don’t get into the index are motivated to improve,” Hyrske said.

Ilmarinen’s acceptance of ESG investing reflects a larger shift in institutional sentiment. Late last year, the Edelman Trust reported that 91% of Canadian institutional investors have altered their voting and engagement policies to be more attentive to ESG risks. Global consulting firm EY also revealed last month also found 97% of institutional investors evaluate nonfinancial disclosures as a way to weigh possible long-term investment risks — though over half of the respondents said nonfinancial company disclosures either lacked or did not adequately present the information they needed to compare with other companies.

But there are still barriers in the way, particularly for retail investors. Those include a lack of ready-made ESG model portfolios and a tendency among ESG funds to be more expensive than plain-vanilla index ETFs. In a poll of US advisors published in mid-2018, Cerulli Associates cited a perceived negative impact on investment performance, difficulty benchmarking SRI/ESG strategies, investment models that do not incorporate SRI/ESG, and lack of fit with respect to client investment policy statements.

There’s also a demographic hurdle, according to the Journal. Baby boomers, who have had time to amass significant savings and wealth to invest, are not as interested in ESG as other generations. But that could change as millennials and women — groups who have generally expressed greater interest in ESG — rise to prominence.


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