In response to the SRI trend, State Street Global Advisors (SSGA) has been expanding its offering of ESG products. But these funds do not replace non-sustainable variants, says Carlo Funk, head of ESG investment strategy for EMEA at SSGA.
Sustainable investment products are a hit with investors. Until October this year, €28.3 billion had already flowed into ESG ETFs in Europe, according to Lyxor figures. This represents almost 60% of the total inflow into the European ETF market.
Sustainable ETFs and SSGA funds also received a lot of new investor money this year, says Funk. ‘Last year we already saw a super-strong inflow, but this year all records are being broken. More and more investors are realising that ESG is not comparable to other trends or themes, which in the past often turned out to be short-lived hypes. Sustainable investment is so logical for most investors that it will become the standard.’
Regulation
The great attention for SRI in the media and asset management industry has contributed to its increasing popularity, notes Funk. ‘Investors are better informed and see the benefits of implementing ESG data, especially in the long term.’
‘In addition, investors who are still sceptical about SRI are forced to take a serious look at the subject because of increasingly strict regulation. As soon as investors start looking into it, they usually see the benefits,’ he adds. Especially in Europe, SRI regulation is making a difference. Such as the regulation on disclosure in the field of sustainability, or SFDR. From 10 March 2021, banks and asset managers must disclose their sustainability information to their investors.
‘Europe is at the forefront of this. But we also see that in Asia countries such as Singapore and Malaysia are preparing legislation on sustainability.’ In the US, Funk sees a different picture. A proposal from the US Department of Labor would actually make it more difficult for pension funds to implement ESG criteria in their investments. Pension funds will have to prove that ESG products offer at least the same or higher returns than non-ESG funds.
Funk: ‘The American approach is very different from the European approach. In Europe we say ‘look at the risks of ESG and climate change and show how to do it’. The Americans first want to see evidence that SRI does not go at the expense of financial returns. In the end, the result can often be the same, namely that ESG investments become mainstream. Because there is enough evidence that SRI does not necessarily cost you returns. Moreover, with the arrival of President Biden, the tone on ESG investments will also become more positive in the US.’
Low-carbon portfolio
SSGA’s sustainable investment policy focuses on the integration of financially relevant ESG factors, says Funk. The central question is: what ESG-related data have a positive effect on the value of companies in the long term? To this end, we use 23 ESG and climate-related data products, depending on the investment category and investment style. We only use ESG data if we are 100% convinced that they add value for our clients.’
According to Funk, the exclusion method based on investment volumes is the most commonly used sustainable strategy. ‘When you have the right data, exclusion is relatively simple, at least if you are sure that exclusion of certain companies does not lead to a lower return. There are ways to apply exclusion that do not have a negative impact on returns.’
Another method is a thematic ESG approach, where companies with superior ESG profiles are being overweight. ‘We are doing this, for example, with our new Climate Equity Funds. These funds overweight companies with low climate risk, which improves the carbon profile of portfolios and reduces CO2 emissions in line with the Paris Accord commitments.’
These are index funds. SSGA does not yet offer ETFs that specifically reduce climate risks in their range in Europe. However, the asset manager does have various index trackers that use the exclusion and ‘best-in-class’ methods.
Not an ESG leader
However, Funk does not see specific sector trackers such as the SPDR S&P Oil & Gas Exploration & Production ETF disappear from the product range any time soon. ‘There are investors who want to categorically exclude companies with an exposure to oil. But there are also investors who see that some oil companies are working hard on a sustainable transition and want to enter into a discussion about this with the management. We will not deny that group access to the sector. These investors want SSGA to keep its foot in the door and take on an activist role to support companies in this transition.’
According to Funk, SSGA will always engage in dialogue with companies and exercise its voting rights at shareholder meetings to influence ESG behavior such as diversity and climate change. ‘Moreover, the asset manager will increasingly include ESG criteria in its products.
However, SSGA does not appear to have the ambition to be an ESG leader. ‘Non-sustainable ETFs will remain in the product range for the time being,’ says Funk. ‘If we are mandated by our clients to invest in a particular market-weighted sector or index that does not exclude certain companies, we will do so. Take our SPY on the S&P 500, the largest ETF in the world. As long as the S&P 500 does not change, we will replicate this index for our clients.’