A report by Tabula Investment Management has revealed that European professional investors are looking for more innovation and transparency in ESG fixed income ETFs, an insight the firm intends to use to build its first ESG product
Some 82% of respondents said they want to see more innovation in the fixed income ETF space when it comes to ESG, with many also looking for their providers to go above and beyond the simple exclusion of controversial companies.
Tabula CEO Michael John Lytle told ESG Clarity: “If you look at the numbers, the number of fixed income ESG products that has been launched is significantly smaller than equity and most of them are specifically targeting green bonds.
“This is slightly problematic, because the green bond space is quite young and lacks definition. There is also a limited number of issuers, so if you choose to invest only in green bonds you limit yourself to that bucket.”
According to Tabula’s research, the majority of investors – some 96% of those surveyed – already invest in ESG fixed income via ETFs. Lytle said two thirds of those have chosen to do so, while one third are required to by internal guidelines. Either way, the demand is there.
And while for 70% of respondents, exclusion of the most harmful companies is the key feature, Lytle said “this is a great starting point but not the whole story”. For example, 63% of respondents showed interest in more targeted products focused on specific issues, such as climate change and diversity.
Another issue the survey highlighted is that the majority of investors – some three quarters of those surveyed – are looking for outperformance of the benchmark from their fixed income ETF products. Only 25% said they wanted to minimise tracking error.
“As we prepare to launch our first ESG product in the final part of the year, this helps us prioritise,” Lytle said. “Do we want to be very conservative or push a bit further, apply some climate change characteristics and do something differentiated? Now we know we should go with the latter.”
This innovation is much better suited to corporate bonds than government bonds, he added, since “governments are very hard to nail down – if you try to do a G7 [ESG] benchmark, what do you do about the US?”
“With a company there is a lot more disclosure and the ESG data that’s coming out is getting more and more granular,” he said.
The firm’s first ESG fixed income product will be one of many planned for launch within a new ESG suite, as the firm, which signed the UN Principles for Responsible Investment this year, intends to make ESG “a core element of [its] business”.
“We want to have a real impact on how this plays out and we don’t have a lot of time,” said Lytle. “We don’t want to take small incremental approaches, we want to grab onto value propositions, get feedback, see what captures investors’ needs and create more products.”
