While the number of exchange traded funds (ETFs) that adhere to environmental, social, and governance (ESG) principles is growing in population terms, fund selectors wonder whether these passive strategies will face headwinds depending on regulatory developments.
Luis Hernández Guijarro, ESG fund selector and fund of funds manager at Esfera Capital Gestión SGIIC, points to particular regulatory developments affecting ETFs linked to the EU Action Plan for Financing Sustainable Growth and the High-Level Expert Group (HLEG) on Sustainable Finance.
"Of course, due to "greenwashing", investors will have more confidence in, for example, Green Bonds´ ETFs, since all bonds in their portfolios are according to an international standard such as the Climate Bonds Initiative (CBI). That is just the case of Lyxor Green Bonds, which have a green bond certificate from a third party, a prestigious company and expert in this field like Vigeo-Eiris.
"At the same time, there are metrics for ETFs such as the Carbon Risk Score from Morningstar to help investors to evaluate funds´ carbon risk exposure and how to contribute to the decarbonisation of their investment portfolios.
"As a portfolio manager of the Esfera II Sostenibilidad ESG Focus FI Fund, I have several ETFs related with SDGs in the portfolio. For example, there are ETFs to cope with the following SDGs: gender equality; clean water and sanitation; affordable and clean energy; climate action; and others. Some of them cope with 10 or more SDGs like UBS ETF - Sustainable Development Bank Bonds Ucits ETF."
By his part Fernando Aguado, investments director at Spanish fund house Fonditel, sees existing ETFs facing regulatory headwinds, but he believes that this may have more to do with concerns around liquidity rather than implementing ESG criteria.