The summer has seen a wave of ESG-related filings, with the focuses ranging from traditional environmental, social and governance (ESG) to political affiliations to alternative energy to female empowerment.
Roughly 100 new filings were made for ETFs or ETF families since the end of May, and at least 25 of those have an ESG element.
Climate Change Funds Emerging
The largest group of these funds are focused on climate change and carbon emissions, with the most notable being FlexShares’ family of five “ESG & Climate” ETFs covering various core asset classes and tracking in-house indexes. That family includes the following funds:
- FlexShares ESG & Climate US Large Cap Core Index Fund
- FlexShares ESG & Climate Developed Markets ex-US Core Index Fund
- FlexShares ESG & Climate Emerging Markets Core Index Fund
- FlexShares ESG & Climate High Yield Corporate Core Index Fund
- FlexShares ESG & Climate Investment Grade Corporate Core Index Fund
Notably, the family includes two fixed income ETFs, an area that is underserved by ESG. (More on that later!)
ETF Managers Group has joined this trend by filing for the ETFMG Breakwave Sea Decarbonization Tech ETF, which focuses on companies involved in reducing the carbon emissions of the global shipping industry.
Broader View Of Climate Change
Meanwhile, several of the filings take a broader focus on climate change and carbon emissions in general.
Impact Shares has filed for the Impact Shares MSCI Global Climate Select ETF, which will track a global index provided by MSCI that targets companies likely to profit from the move toward a low-carbon economy.
J.P. Morgan takes a slightly different angle with its filing for the JPMorgan Climate Change Solutions ETF, an actively managed ETF that invests in companies involved in the provision of solutions for climate change, such as those operating in the renewable energy and sustainable transportation industries, among others.
Fossil Fuels Focus
Strategy Shares’ proposed fund in this area takes a fairly broad approach, as the active strategy of the Strategy Shares Halt Climate Change ETF selects funds based on their expressed commitment to reducing their own carbon emissions and how the products and services they provide help to reduce carbon emissions overall.
Deutsche Bank is looking to roll out the Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF , which will track an index from Solactive that targets emerging market companies that have been screened for standard ESG criteria and that are actively working to limit their carbon emissions, with emissions additionally being used to adjust company weights.
Finally, the Sphere 500 Fossil Free Fund takes perhaps the simplest approach in this category, removing fossil fuel companies from an index of the largest 500 U.S.-listed companies.
Other filings take more a thematic approach to the ESG space.
Most notably, VanEck Global has filed for the VanEck Green Metals ETF, which invests in companies that mine, produce or recycle the metals required for products or processes that facilitate the transition to a lower-carbon economy, though those metals are not identified in the prospectus.
Similarly, the USCF Sustainable Net-Zero Battery Strategy Fund will invest in derivatives and equities of domestic and foreign companies that operate in the battery- and sustainable energy-related metals space.
Ocean Pollution ETF
IndexIQ has also filed for multiple index-based funds in this category, with the IQ Cleaner Transport ETF investing in companies meeting certain broad ESG criteria while producing electric vehicles and providing services and products that contribute to the move to lower-carbon transportation.
The IQ Clean Oceans ETF takes a similar approach, by investing in companies that support reducing ocean pollution through their products and services.
The ESG Next Generation Technology ETF, which was filed under the Collaborative Investment Series Trust and will be advised by Tuttle Capital, will take an active approach and invest primarily in innovative technology companies that are included in widely used ESG indexes. However, Tuttle will apply its own ESG research in selecting holdings. The prospectus also notes the fund can invest in VIX-related products.
There’s also a conservative political values fund in the works. The 2VA American Freedoms ETF will track an index derived from the largest 1,500 U.S.-listed stocks that selects companies based on their social activism in support of conservative values.
There was also a handful of filings for funds that support equality for marginalized groups. The Invesco Racial and Gender Diversity ETF will have an underlying index that selects companies based on the diversity of their corporate leadership, their track record of diversity in leadership and their overall diversity score.
The IQ Engender Equality ETF and the Simplify Susan G. Komen Shares for the Cure ETF take a somewhat different approach, both targeting gender-related issues. The Simplify fund takes part of its name from a well-known charity that has the goal of preventing and curing breast cancer. The fund will invest in biotechnology-related companies via active management, which will take into account a variety of criteria. It will donate its net profits to its namesake organization.
Meanwhile, the IndexIQ fund is described as being in “alignment with Girls Who Code Inc.” and uses data and standards from Equileap to construct a 75-security index of large cap U.S. stocks that support gender equality in the workplace. Although it is not entirely clear in the prospectus, it appears the fund will donate at least some of its proceeds to the Girls Who Code charity.
There are not a lot of ESG ETFs that cover the fixed income space, but there were at least four filings in the covered time period that fall into this category.
State Street Global Advisors has filed for two ETFs that apply ESG standards to subsets of the fixed income asset class, the SPDR Nuveen Municipal Bond ESG ETF and the SPDR [Bloomberg SASB Developed Markets Ex US ESG Select] ETF.
The former is actively managed by subadvisor Nuveen Asset Management, which applies ESG criteria to the components of the Bloomberg Barclays 3-15 Year Blend (2-17) Municipal Bond Index to screen out unacceptable securities, and uses a rules-based, value-oriented approach to selecting from the remaining pool.
The latter simply tracks the Bloomberg SASB Developed Markets ex US Large & Mid Cap ESG Ex-Controversies Select Index, which incorporates ESG criteria, with an emphasis on corporate governance.
More Green Bond Funds
Tuttle Capital Management will advise three bond ETFs that were filed under the Collaborative Investment Series Trust. The Green Bond ETF will track the US Corporate Green Bond Income Index. Similarly, the Green Short Term Bond ETF will track the US Short Term Corporate Green Bond Income Index, targeting green bonds with five years or less to maturity.
The Impact Bond ETF is a little different. While green bonds generally fund environmentally friendly projects, the companies in this ETF’s underlying index tracks securities issued by entities deemed to be “green, social, or sustainable,” according to the prospectus.
The Hartford Sustainable Income ETF will be managed by Wellington Management and invest in fixed income securities from foreign and domestic issuers exhibiting attractive yield characteristics and positive ESG characteristics, or that the fund managers believe have a positive social or environmental impact.
General ESG Funds
The filings also include several funds that apply ESG criteria to popular equity indexes, such as the SPDR S&P SmallCap 600 ESG ETF, which will track a version of the S&P SmallCap 600 Index. The iShares ESG MSCI USA Min Vol Factor ETF will do the same with the MSCI USA Min Vol Factor Index.
Meanwhile, the Morningstar ESG Moat ETF will track an index that incorporates ESG standards into the index provider’s “Wide Moat” methodology, which selects companies with strong competitive advantages or market share.
The ESG Momentum Factor ETF is another actively managed ETF that will be advised by Tuttle Capital. It will select companies that appear in widely referenced ESG indexes based on their price momentum characteristics.
The VictoryShares THB Mid Cap ESG ETF will also be actively managed, and will use ESG criteria and carbon risk metrics to select companies that fall within the market capitalization range of the Russell Mid Cap Index.
Finally, Janus Henderson has filed for three actively managed sustainability-related funds. The Janus Henderson International Sustainable Equity ETF and the Janus Henderson U.S. Sustainable Equity ETF both have similar methodologies, and use ESG criteria to select portfolios of 30-50 securities focused on the foreign or U.S. markets.
The Janus Henderson Net Zero Transition Resources ETF will target companies that meet various ESG criteria while advancing the global transition to a lower-carbon economy, primarily those in the materials, energy, utility and agriculture sectors, according to its prospectus.
The global pandemic and a wide range of climate-related disasters have driven investors toward ESG strategies, and the ETF space is still responding to that demand, such that roughly a quarter of new filings over the past 10 weeks fall under an ESG designation.
Consider that a decade ago, few people even knew what the letters “ESG” stood for.
While the broad equities space is well-covered by ESG strategies, there is still room to grow in the areas of active management, fixed income and specialty strategies.
Contact Heather Bell at [email protected]