ETF TV News #65 Willem Keogh UBS Asset Management discusses demand for ESG ETFs and SFDR

Dan Barnes Welcome to ETF TV News – your update on newly issued exchange traded funds and products, I’m Dan Barnes. Joining me today are Willem Keogh, head of passive and ETF investment analytics at UBS Asset Management in Switzerland. And we’re going to be discussing demand for ESG ETFs and what SFDR means to investors. And of course, also Deborah Fuhr from ETFGI, and she’s going to be giving us an update on newly issued products. Deborah, welcome to the show.

Deborah Fuhr Thank you.

Dan Barnes Can you tell us what we’ve seen over the previous week in terms of new issues?

Deborah Fuhr Yeah, last week was very busy; we had 45 new listings, and that’s the highest so far this year. 34 new cross listings. They were from 25 different insurers on 11 exchanges. Two were focused on commodities, two were digital currencies, one fixed income and 40 equity. There was again, a focus on thematics, and we’ve also seen that continuing focus on ESG, including UBS, which did an S&P 500 Elite ESG product last week.

Dan Barnes And Willem, I’d like to turn to you. Can you tell us what’s been the demand for ESG ETFs in Europe and how has that been evolving?

Willem Keogh So I think we’ve seen during 2020 there has been a very strong demand for ESG ETFs, and I would say an increasingly strong demand. So we saw for the whole year basically inflows of equity ESG ETFs around 40 billion dollars and compared to non-sustainable equity products, which only had an inflow of 26 billion. And this was also driven by COVID-19, which stalled quite a lot of outflows in core equities during the start of the pandemic. And what we’re seeing this year is equity and fixed income ESG ETFs have already raised nearly 19 billion dollars in the UN. While non-sustainable inflows are around 21 billion, so we’re nearly at a 50-50 ratio at this point in time, which I would say shows you how the sustainable ETFs have really taken off over the last couple of years.

Deborah Fuhr Last week was also important in terms of the SFDR regulations coming into force, in terms of reporting. You know, SFTR is designed to provide greater transparency on the degree of sustainability of financial products, but Willem, which products are covered by SFDR and what does it mean for investors?

Willem Keogh So I think if we look at this regulation, Debbie, we see that it is trying to harmonize rules for financial market participants and financial advisors, particularly around transparency on how sustainable risk is being integrated and what adverse, sustainable impacts how they have been addressed in the financial products. Then I think the most important part of this is sustainable-related information and how it is disclosed. So if we look at the kind of products that have been impacted, I mean, this is the full spectrum of products, right? So anything from a UCITS ETF to a pension fund; basically anything that has to do with investments is now being covered.

But I think the most important part from an investor-perspective now, is that the disclosure and the transparency that SFDPR brings now allows an investor, basically at first glance, to see whether a financial product is sustainable or not, and then also which degree of sustainability has been integrated into this product.

Deborah Fuhr So there’s Article 6, 8 and 9; can you help us understand the differences between those?

Willem Keogh If we start off with a very rough rule of thumb, you could say that Article 6 products are basically, you can break it into two parts, so the part that says ESG or sustainability is not considered at all, or if you have an ESG risk consideration, which is integrated.

If you then take a step up to Article 8; this is where you are promoting ESG or sustainable products, where there is a clear integration of good governance and of ESG as we know it.

And then in Article 9 is basically the top tier where we’re talking about very clear, sustainable objectives, talking about impact investing, and then obviously the products that are aligned from a Paris-aligned perspective. So just as an example, a Paris-aligned benchmark, you have to reduce the carbon footprint by 50 percent. And then on an annual basis, you have to meet a seven percent decarbonization path. So on an annual basis, you have to meet these criteria. It’s measurable. It is very clear and everybody knows exactly what they are invested in.

Deborah Fuhr How would we see most ESG ETFs in terms of how they would be classified?

Willem Keogh So what we can see at the moment, I would say that most of the ESG ETFs would fall into Article 8 something like the MSCI SRI  Low Carbon Select Indices, that we’ve developed together with MSCI. And then, as you mentioned earlier, we have launched the second part of our ESG or S&P ESG integration. The first was our S&P 500 ESG, and the second has now been the S&P 500 ESG Elite, which follows a much stricter approach in terms of ESG integration. And then when it comes to Article 9, we currently have one example like that in our UBS offering, which is a climate transition benchmark which follows a selected UBS climate aware, Global Development Equity CTB Index.

Deborah Fuhr That’s great. Thank you very much.

Willem Keogh Thank you very much for having me.

Dan Barnes So Debbie, turning to you. Can you give us a bit more color on some of the new products we saw launched over the previous week?

Deborah Fuhr Graniteshares has launched 14 new ETPs here in London. They are on baskets of tech companies, they’re leverage, and they’re inverse, so I think that’s a significant number of new launches. I mean, there’s weeks where we’ve only seen 14 products come to market. We’ve also seen another Bitcoin product launched in Canada. And we saw Ethereum launched here in Europe. So I think we’ve seen a significant year in terms of growth in assets and growth in net inflows and product launches so far.

Dan Barnes That’s great. Thank you very much, Debbie.

Deborah Fuhr Thank you.

Published on March 16, 2021