ETF Insight: Stewardship credibility the next battleground for ETF issuers

Tom Eckett

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Taking an active role in stewardship is becoming an increasing area of focus for ETF issuers amid pressure from clients and rising environmental, social and governance (ESG) assets.

A recent ShareAction report, which ranked the world’s largest asset managers’ approaches to responsible investment, found the majority of passive managers showed a “limited approach” to effectively integrating ESG issues into investment decisions and stewardship activities.

The likes of BlackRock, Vanguard and State Street Global Advisors (SSGA) were ranked in the D and E categories by ShareAction highlighting poor responsible investment practices.

The ‘Big Three’, as they are known, have all come under fire in recent times around their company voting records with regards to ESG-related issues. According to a 2019 Majority Action report, BlackRock and Vanguard voted in favour of climate-critical resolutions just five and four times out of 41, respectively.

Despite this however, asset managers are under increasing pressure to improve on ESG-related issues with the ShareAction report warning “a business-as-usual approach” could put clients’ money at risk.

“Passive investors should take significant steps in their risk management processes through stewardship activities and ESG integration.”

Improvements have already been seen this year with ETF issuers recognising the need for strong stewardship. BlackRock’s chairman and CEO Larry Fink, in his annual letter to chief executives, pledged to put sustainability at the centre of the firm’s investment strategy by increasing its ESG-related assets to $1trn over the next decade.

This, added to BlackRock's commitment to double its ESG and index offering by the end of 2021, highlights the world's largest asset manager more serious approach to tackling the climate change threat.

It is clear the trend is here to stay. According to data from Morningstar, ESG ETF assets in Europe more than doubled last year to €34bn with this number set to rise even further.

The opportunity to capture assets combined with having a positive impact on climate change is the type of no brainer all ETF issuers should be looking at. This was highlighted in a Moody’s report earlier this month which found asset managers that incorporate ESG strategies in their product range show above-average organic growth.

ShareAction recommended five effective approaches to stewardship and ESG integration ETF issuers can take including:

  • Choosing ESG-themed indices and benchmarks

  • Developing robust and comprehensive methodologies for identifying areas for company engagement on ESG issues

  • Engaging with investee companies on ESG issues using time-bound engagement objectives with escalation procedures for when objectives are not met. These may include voting on ESG shareholder proposals, voting against the board of directors, and/or screening a company out of the investment universe

  • Weighting of constituent companies within the index based on ESG factors

  • Engaging with index providers to exclude companies involved in ESG breaches from the overall index

Not all passive managers scored poorly, however. Legal & General Investment Management (LGIM) was the only ETF issuer to be given an A rating by ShareAction which “demonstrates that passive investors can have a leading approach to responsible investment,” the report added.

Speaking to ETF Stream, Howie Li, head of ETFs at LGIM, said incorporating ESG into the investment process is a very important element of being an ETF issuer.

He explained LGIM's corporate governance department, which analyses the companies the ETFs invest in, makes the decisions on areas such as how to vote at shareholder meetings.

“We are very active [with engagement] on the ETF side,” Li added. “At LGIM, we want to drive the companies we invest in to behave better.”

ETF Insight: Are ETF and index providers taking ESG seriously?

Meanwhile, Athanasios Psarofagis, ETF analyst at Bloomberg, said it is not only ETF issuers but index providers that also have a key role to play.

He added further screens on some of the major indices would increase the emphasis on sustainability and stewardship.

“Index providers need to take a look at themselves,” Psarofagis continued. “While scrutiny of ESG ETFs is mostly directed at issuers, index providers are also key players, possessing the data needed to run ESG-focused indexes and the power to set criteria for inclusion in broader benchmarks.”

ETF Insight is a series brought to you by ETF Stream. Each week, we shine a light on the key issues from across the ETF industry, analysing and interpreting the latest trends in the space. For last week’s insight, click here.

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