The ESG boom continues

by Rebecca Hampson, 7th February 2019

The number of Environment, Social & Governance (ESG) ETFs on the London Stock Exchange has boomed in the past year indicating a trend towards incorporating this strategy. But what benefit does ESG add, is it necessary in a portfolio and if so, how do you choose the best ones?

When we published an overview of ESG last November there were only 23 ETFs (now 35) on the exchange and we focused on how much ESG boosted returns. One of the biggest criticisms of ESG is that historically it reduces returns. The conclusion was that ESG is a long-term play.

One of the oldest ETFs on the exchange is the iShares’ MSCI Europe SRI UCITS ETF (IESG) which launched in February 2011. Its one year return is 1.89%, its three year return is 12.76% and five-year 7.34%. (Its five year performance is shown in the graph below)

Source: Bloomberg

The most recent consensus seems to be that sustainable investing is not just a trend, but instead is becoming normalised as part of investing.

iShares put a report out earlier this year that found sustainable investing is no longer a niche area, it reported: “We are seeing a surge in clients’ and portfolio managers’ interest in incorporating sustainability-related insights into their investments. This demand looks poised to accelerate — driven by societal and demographic changes, increased regulation and government focus, and greater investment conviction.”

Index provider, Solactive who put out a range of ESG indices this year, said at the time that “It is going to dominate contemporary investors decision on financial strategies for the future to come.”

Last year ESG ETFs saw total assets invested around the world rising nearly 30%, attracting $7.61bn in net new assets. At the end of December 2018, there were 208 ESG classified ETFs/ETPs, with 492 listings, assets of $22.47 Bn, from 61 providers listed on 26 exchanges in 23 countries.

However, performance over the past year still isn’t as good as one might hope.

Three ESG ETFs on offer IESG (black), Lyxor’s MSCI EMU ESG Trend Leaders DR UCITS ETF (EESG) (orange) and Xtrackers ESG MSCI World UCITS ETF (ZXWO) (purple), have not performed well.

Source: Bloomberg

Also, inflows in December last year decreased 3.20% from the prior month to $679m.

But interest is growing.

According to iShares, they are seeing greater interest from their clients in sustainable investing. “Investors want deeper knowledge about the field, more sustainable investing options, enhanced data and reporting on impact, and increased commitment from asset managers to integrate sustainability into investment processes. Millennials, in particular, look set to propel the future of sustainable investing. This group of future financial decision-makers is asking more of companies. And regulators are expanding their focus on incorporating sustainability into investment information and decision making.”

What is also apparent is that ESG factors can often tie in with a company’s long-term growth potential. Access is now easier than it has been historically.

For example, BlackRock and JP Morgan launched ESG fixed income ETFs only last year. These have performed particularly well over the last three months with the iShares JP Morgan ESG USD EM Bond ETF (EMES) returning 5.32%.

Another ETF doing particularly well over the past three months is the Lyxor MSCI EM ESG Trend Leaders UCITS ETF (MESG), which has returned 8.21%. It launched in May last year.

With the advent of easier access and more options to choose from, it is a sector that is clearly evolving to match demand.

Below is a list of ESG & SRI ETFs available on the LSE.

ETF	3M RTN	TER	INDEX
iShares MSCI Japan ESG Screened UCITS ETF SAJP	-0.13%	0.2%	MSCI Japan ESG Screened Index
iShares MSCI Japan ESG Screened UCITS ETF SDJP	-0.13%	0.2%	MSCI Japan ESG Screened Index
iShares MSCI USA ESG Screened UCITS ETF SDUS	0.44%	0.2%	MSCI USA ESG Screened Index
iShares MSCI USA ESG Screened UCITS ETF SASU	0.51%	0.2%	MSCI USA ESG Screened Index
iShares JP Morgan ESG USD EM Bond UCITS ETF EMES	5.32%	0.45%	JP Morgan ESG EMBI Global Diversified index
iShares JP Morgan ESG USD EM Bond UCITS ETF EMSA	5.31%	0.45%	JP Morgan ESG EMBI Global Diversified index
iShares MSCI Europe ESG Screened UCITS ETF SDUE	1.18%	0.12%	MSCI Europe ESG Screened Index
iShares MSCI Europe ESG Screened UCITS ETF SAEU	1.18%	0.12%	MSCI Europe ESG Screened Index
iShares MSCI EMU ESG Screened UCITS ETF SMUD	0.20%	0.12%	MSCI EMU ESG Screened Index
iShares MSCI World ESG Screened UCITS ETF SAWD	1.27%	0.20%	MSCI World ESG Screened Index
iShares MSCI World ESG Screened UCITS ETF SDWD	1.24%	0.20%	MSCI World ESG Screened Index
iShares MSCI EMU ESG Screened UCITS ETF SAUM	0.21%	0.12%	MSCI EMU ESG Screened Index
Ossiam ESG Low Carbon Shiller Barclays Cape US Sector UCITS ETF 5HEP	2.81%	0.85%	Shiller Barclays CAPE US Sector Value Net TR Index
Ossiam ESG Low Carbon Shiller Barclays Cape US Sector UCITS ETF 5HED	2.17%	0.85%	Shiller Barclays CAPE US Sector Value Net TR Index
iShares MSCI Europe SRI UCITS ETF IESG	2.56%	0.30%	MSCI Europe SRI Index
Lyxor MSCI EM ESG Trend Leaders UCITS ETF MESG	8.21%	0.30%	MSCI EM Select ESG Rating and Trend Leaders Net Return USD Index
Lyxor MSCI USA ESG Trend Leaders DR UCITS ETF UESG	1.96%	0.25%	MSCI USA Select ESG Rating and Trend Leaders Net Return USD Index
Lyxor MSCI World ESG Trend Leaders DR UCITS ETF WESG	1.76%	0.30%	MSCI World Select ESG Rating and Trend Leaders Net Return USD Index
Xtrackers ESG MSCI USA UCITS ETF XZMU	2.14%	0.20%	MSCI USA ESG Leaders Low Carbon Ex Tobacco Involvement 5% Index
Xtrackers ESG MSCI Japan UCITS ETF XZMJ	1.86%	0.30%	MSCI Japan ESG Leaders Low Carbon Ex Tobacco Involvement 5% Index
Xtrackers ESG MSCI World UCITS ETF XZWo	1.86%	0.30%	MSCI World ESG Lea Leaders Low Carbon Ex Tobacco Involvement 5% Index
Xtrackers ESG MSCI Europe UCITS ETF XZEU	1.67%	0.30%	MSCI Europe ESG Leaders Low Carbon Ex Tobacco Involvement 5% Index
Lyxor MSCI EMU ESG Trend Leaders DR UCITS ETF EESG	0.91%	0.20%	MSCI EMU Select ESG Rating and Trend Leaders Net Return EUR Index
Ossiam World Esg Machine Learning UCITS ETF OWLP			The objective of the Fund is to deliver the net total returns of a selection of equities from developed markets
Ossiam World Esg Machine Learning UCITS ETF OWLU			The objective of the Fund is to deliver the net total returns of a selection of equities from developed markets
JPMorgan Global Research Enhanced Index Equity ESG UCITS ETF JREG	1.30%	0.25%	The objective of the Sub-Fund is to achieve a long-term return in excess of the Benchmark by actively investing primarily in a portfolio of large- and mid-cap companies, in developed markets globally.
JPMorgan US Research Enhanced Index Equity ESG UCITS ETF JREU	1.07%	0.25%	The objective of the Sub-Fund is to achieve a long-term return in excess of the Benchmark by actively investing primarily in a portfolio of large cap US companies. The Sub-Fund will seek to outperform the Benchmark over the long-term
JPMorgan Global Emerging Markets Research Enhanced Index Equity ESG UCITS ETF JREM		0.30%	The Benchmark consists of largeand mid-capitalisation stocks issued by issuers in Emerging Markets globally
JPMorgan Global Research Enhanced Index Equity ESG UCITS ETF JGRE	1.94%	0.25%	The Benchmark by actively investing primarily in a portfolio of large- and mid-cap companies, in developed markets globally
JPMorgan US Research Enhanced Index Equity ESG UCITS ETF JURE	-0.32%	0.25%
JPMorgan Europe Research Enhanced Index Equity ESG UCITS ETF JERE	1.73%	0.25%	The objective of the Sub-Fund is to achieve a long-term return in excess of the Benchmark by actively investing primarily in a portfolio of large cap US companies. The Sub-Fund will seek to outperform the Benchmark over the long-term
JPMorgan Global Emerging Markets Research Enhanced Index Equity ESG UCITS ETF JMRE		0.3%	The Benchmark consists of largeand mid-capitalisation stocks issued by issuers in Emerging Markets globally