Tabula survey reveals lack of innovation in fixed income ESG ETFs

New research from specialist fixed income ETF provider Tabula Investment Management reveals that European professional investors want to see more innovation in fixed income ESG ETFs. 

Tabula has recently signed the UN-supported Principles of Responsible Investment and is keen to understand and incorporate the views of investors as it implements those principles. 

“We found that 96 per cent of investors that we surveyed are already using ESG ETFs, which is a remarkable level of penetration in only a few years,” says Tabula CEO Michael John Lytle. “However, in fixed income specifically, the vast majority of respondents want to see more innovation, broader coverage of exposures and more transparency around the effect of the fund’s approach.”

The research also sheds light on specific features that professional investors look for in ESG ETFs. The top answer, cited by over 70 per cent of respondents, was the exclusion of the most harmful companies. “The idea of avoiding harm is clearly at the forefront of investors’ minds and the exclusion of certain companies – for example, those violating the UN Global Compact or manufacturing controversial weapons – is becoming a minimum requirement,” says Lytle.  “This is a great starting point but not the whole story.”

The survey also revealed an interesting preference for outperformance potential over benchmark tracking. “Many existing ESG ETFs are designed to closely track traditional benchmark indices,” says Lytle. “However, 75 per cent of our respondents saw outperformance potential as important, compared to 25 per cent preferring to minimise tracking error. This could indicate that investors are now seeing ESG as a driver of long-term performance, not just a qualitative overlay.” This ties in with strong demand (63 per cent of respondents) for more targeted products focused on issues like climate change and diversity.

“Responsible investing is evolving rapidly,” says Lytle. “This research gives us valuable insights into the broad trends and, crucially, the different views and priorities across countries and investor types. Creating innovative ESG ETFs that meet investor needs is a challenge for providers and one that Tabula is actively embracing.”