In tandem with global protests campaigning for a change in our environmental impact, ETF issuers have been expanding their equity and fixed income offering with products including an environmental, social and governance (ESG) tilt.
One ETF launch which really caught my eye in 2019 was UBS’s ESG-screened version of the most popular index in the world, the S&P 500.
The UBS S&P 500 ESG UCITS ETF (5ESG) tracks the famous S&P 500 but its ESG screener removes companies with poor ESG scores as well as stocks within controversial industries such as tobacco or weapon manufacturing.
The timing of the launch in April was well executed as it was amid high demand from investors for sustainable products as well as the parent index reaching new highs in 2019. In the run-up to Christmas, the S&P 500 offered year-to-date returns of 28.3% so there was a perfect opportunity to fuse the two popular trends.
The 5ESG’s screener removes roughly 200 companies from the S&P 500 benchmark leaving 300 significantly high scoring ESG stocks.
It uses a light ESG screener which is a good steppingstone for investors in US equity that are looking for a sustainable option but do not want to commit to a deeper green version such as the UBS MSCI USA Socially Responsible UCITS ETF (USSRF).
In 2020, ESG is expected to become more mainstream which will mean ESG strategies will be more complex to satisfy institutional investors' demand for market-rate returns.
With that said, 5ESG has outperformed the S&P 500 over the last six months by seven basis points suggesting you can do good and benefit from outperformance. Therefore, I see 5ESG attracting further assets in the New Year while performance remains high.
Furthermore, 5ESG is domiciled in Ireland which offers a tax benefit to European investors when investing in US equity ETFs compared to products domiciled in mainland Europe. This is advantageous for the domestic currency investors in Europe who are charged 0.22% in management fees whereas USD investors are charged 0.12%.
In the eight months 5ESG has been trading, it has managed to grow its assets to $322m. While it is significantly behind USSRF which is three and a half years older, I imagine the S&P 500 ESG screen ETF is set to capture more flows next year.
S&P Global, the parent company of S&P Dow Jones Indices, acquired RobecoSAM’s ESG rating business in November. This suggests the data offering and insights for 5ESG’s benchmark will be more detailed for investors as S&P looks to dominate the ESG data space.