MSCI’s Mahmood publishes ESG ETF report

Rumi Mahmood, Nutmeg

Rumi Mahmood, Senior Associate, ESG Research, MSCI has published his first, in what is planned to be a series, of reports on ESG fund transparency. 

Mahmood (pictured) recently joined MSCI from Nutmeg and has started with an assessment of the landscape of equity and bond ETFs, which has, as he says, ‘been under a considerable spotlight as index-based investing continues to gain momentum each year’. In 2020, ESG ETFs saw net flows in excess of USD75 billion, more than three times the prior year, or approximately 10 per cent of overall ETF net flows globally.”

The report highlights that Europe led the world in the availability of ESG ETFs and the pace of product launches, with over 50 per cent of global ESG ETFs being domiciled in Europe, according to the report

European investors demonstrated a clear preference toward values- and screens-based ESG ETFs, in which investor values/preferences are aligned with generating financial returns. North America offered more choice in integration-based ESG ETFs, along with thematic approaches.

Clean energy was a popular theme with investors in the US and Europe, with the top five ETFs (by assets) that track clean energy indexes holding over USD18 billion in assets.

Europe also led on ESG performance, Mahmood says, with ETFs with European exposure demonstrating higher ESG ratings relative to those with other geographic exposures. Globally, 60 per cent of AAA-rated equity ETFs and 58 per cent of AAA-rated bond ETFs tracked indexes with a European focus. Notably, there were no European ETFs that were ESG laggards in either equity or fixed income, Mahmood says. Across Environmental, Social and Governance scores funds with a European focus outperformed their global peers. In board effectiveness and diversity, European ETFs also outperformed. 

“There is room for product expansion in North American- and Asian-focused ETFs, where investors would be hard-pressed to find an ESG ETF that is rated as a leader. From a possible 1,349 North American-focused equity ETFs, only 76 of them (5.6 per cent) are leaders, with options being even more limited for investors targeting Asia,” Mahmood writes.

The driver behind producing the report was a demand for transparency from asset managers and ETF issuers to get a truer sense of where the product universe stands, Mahmood says. “Alongside the growth in ETF assets, their function as an ESG integration tool in investors’ portfolios is also becoming more established. With that in mind, it’s important to examine the ESG characteristics of the product universe, thus enabling more-informed fund selection decisions for investors and product issuers that may want to achieve specific ESG outcomes.”

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