A new survey of US Equity ESG ETFs issued by USD16 billion investment firm Sage Advisory Services finds that investors need to ‘look under the hood’ when investing in ESG ETFs.
The study examined 24 of the largest US equity ESG ETFs that have an ESG-integration approach with a total of roughly USD25 billion in assets.
The authors of the report, Komson Silapachai,Vice President – Research & Portfolio Strategy and Emma Harper, found that often two funds with ‘ESG’ in their names could have completely different sector exposures, integration methodologies, exclusions, and levels of concentration.
The firm writes that in a category where 97 per cent of assets are passively managed, the index provider and third-party ESG data provider rises in importance. MSCI is the dominant player in ESG ETFs, with 87 per cent share of assets in both index and ESG data.
The survey found that ESG index construction can vary across the same index provider, resulting in differences in risk characteristics and performance outcomes.
“ESG does not inherently outperform or underperform the market because there many ways to construct an ESG index and strategy. For a given passive strategy, knowing the sources of concentration risk matters most in choosing or constructing ETF portfolios,” the report says.