ESG Unlocked: Europe out in front - Page 20


From index creation to portfolio construction

Understanding the value chain of ESG ETFs
Author : Jamie Gordon

The swathes of new ETFs taking different approaches to ESG , regulation and market volatility were all in focus during this panel where participants reflected on how to integrate sustainability in portfolio construction .

Jaspreet Duhra , managing director and global head of ESG indices at S & P Dow Jones Indices , started by stating that despite “ cynicism and the market downturn ”, ESG continues to be front and centre in investors ’ minds and Europe remains home to the first movers and innovators in this space .
“ Regulation is a huge topic in the European market , so we spend a lot of time deciphering that given it impacts us as benchmark providers , but also our partners , product providers and asset owners ,” Duhra continued . “ We will see quite a lot of change on the back of regulation , especially the MiFID requirements around measuring ESG funds and disclosures .”
Echoing her thoughts , Andrew Walsh , head of UK and Ireland ETF and passive sales at UBS Asset Management , added the last six months have been “ very choppy ” but innovations in areas such as fixed-income make ESG an exciting area to watch .
“ The latest thing coming through has been SFDR phase two , which is set to come in from next year . We have had a lot of people asking about Article 9 and how it works in practice ,” Walsh said .
However , not all have been as enthusiastic about the wave of ETFs in recent years offering green angles on broad benchmarks .
As Patrick Thomas , head of ESG portfolio management at Canaccord Genuity Wealth Management , argued : “ What has happened is you have had a bunch of product launches that have basically tried to replicate conventional market indices , slightly reordered the stocks around , and then badge something as being ESG .
“ And ultimately , there has been demand for that because there are plenty of investors who want exactly that . They want the S & P 500 or the FTSE 100 and they want to tick a box .”
How to slice beta with ESG
What Thomas highlighted is a key debate within ESG . Can something be said to have sustainable credentials using a rulesbased approach to over and under-weight certain securities , and if so , which is the right way to do this ?
Duhra noted there is a “ spectrum ” of ways to gain index exposure with an uplift in ESG while minimising performance deviation .
Looking at her firm ’ s S & P 500 ESG index series , Duhra said : “ We are trying to keep the same industry group exposures , but we are making material changes by removing 200 companies versus the parent benchmark . We know investors want S & P 500 exposure and ESG but have constraints when it comes to tracking error .”
“ If you want to go more high conviction , investors access transition indices where
the tracking error as result is a bit higher ,” Duhra said . “ Investors need to make a choice on how strong their conviction is with relation to ESG . For SPDJI , it is about offering that spectrum of solutions .”
She also noted the gradual process of gaining authority and investor support for ESG . A key part of this has been improving data in terms of the quality and volume of company disclosures , however , these disclosures are not always done in comparable ways meaning index providers still rely on a degree of modelling and estimation .
“ It is up to us to be transparent about the way we are rating companies and make it clear whether we are measuring companies from a risk or impact perspective ,” Duhra continued . “ From a data perspective , there is work we have to undertake . Even on relatively straightforward issues such as carbon footprint , it is not simple , let alone on issues such as what percent of a board should be made up of women .”
UBS AM ’ s Walsh agreed and said
20 ESG Unlocked : Europe out in Front October 2022