Luck or careful planning – how one index provider and two ETF issuers dominate the ESG trackers listed on the London Stock Exchange

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Allan Lane, Algo-Chain

It’s fair to say the world has turned upside down since BlackRock’s Larry Fink unleashed his annual investment letter back in January.  For those that have not read it, his message was simple, it is time to go all in on ESG.  

“In the near future – and sooner than most anticipate – there will be a significant reallocation of capital”, says Fink, whose call to action may well have set off a chain reaction across the fund management industry as an increasing number of managers are selecting funds that assertively screen out fossil fuels, demonstrating their commitment to sustainability.

To see the extent to which this narrative has come into play, one only needs to look at the top 10 ESG ETFs by assets under management, listed on the London Stock Exchange.  What was once seen as a marginal area of activity, is now demonstratively part of the mainstream.

When I stare at the returns of many a stock or ETF I am always reminded of Benoit Mandelbrot, who became fixated with their fractal behaviour, and their DNA signature of self-similarity where at all scales of observation the same patterns appear to be on display.  And so it is with league tables in the ETF space, it doesn’t matter when in time, or what list of funds we are looking at, the same overall observations will be in place.  A very small number of ETFs will account for most of the assets and within that space, invariably, it is the blue-chip mainstream products that will likewise dominate the proceedings, for example US Large Cap Equities.

With reference to the table below, on the LSE the top 10 ESG themed ETFs account for over GBP10 billion in assets but are dominated by very few players.  On the benchmarking front, MSCI account for all eight Equity ETFs and two Fixed Income ETFs that are benchmarked by the ‘no it doesn’t roll off the tongue’ trio of Bloomberg Barclays MSCI.  As for the issuers, iShares and UBS each take five of the top 10 slots, with some overlap of the exposures on offer.  The scope of the exposures on offer, is repeating the growth pattern shown when the ETF industry first grew its wings: US, Europe & World equities along with Euro Corporate Bonds – let’s not forget, it’s this stuff that pays the bills!

Top 10 ESG ETFs

Source: Algo-Chain/IHS Markit - Value Date: 30 Apr 2020

Many of us are superficial at heart, so can you blame us for wanting to see how well these ESG trackers have compared to their non-ESG counterparts?  Ok, to properly make that comparison, one would ideally like two to three economic cycles to have past, but after six weeks of ‘Covid-19’ lockdown, one year of comparison data would feel like an eternity.  

ETFs that have less exposure to energy stocks and to more companies that have strong balance sheets one might surmise would be the best performers of late, and at the risk of trivialising ESG products, that is often the case.  The second and third of our charts display this outperformance since the start of the year, and right on cue, the iShares MSCI USA SRI tracker has outperformed the MSCI USA non-SRI benchmark. In the middle between the two is the UBS MSCI Socially Responsible ETF, which has the same ESG screening applied to stocks as the iShares one with the one caveat that it doesn’t have an additional reduction to fossil fuel led companies. As with the composition of the top 10 AUMs, the conclusions are surprisingly clear, and if I was Larry Fink, I would be high fiving it with my press officer as the basic tenet of his world view has come to pass – as luck would have it going underweight exposure to fossil fuel led companies has proven to be the investors’ friend. 

Sifting through the creation and redemption lists for each of the top 10 ETFs it is again very striking how at the very height of the crisis, there were net inflows for the month of March.  In a market which saw some equities plunge 50 per cent, it’s as if some of these ESG-centric ETFs acted like safe haven assets.  Although we can still see the debris in our rear view mirror, and it is too early to reach any conclusion, I think history will look back on the few months of 2020 as the time when the gods were kind to the sustainability movement, and particularly unkind to capitalism.  Every society throughout the ages has been driven by beliefs, and it does seem judging by the headlines that the jury has already passed its verdict – sustainable investing in on track to become the new default.

ESG Trackers
Non-ESG Trackers

Source: Algo-Chain/IHS Markit - Value Date: 30 Apr 2020

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