In Focus: Megatrends  

What is driving 'massive innovation' in bespoke ETFs?


Bespoke is not a term often associated with passive investing but "the industry has evolved", says Lidia Treiber.

Speaking on the FTAdviser In Focus Fireside Chat, in partnership with Wisdom Tree, Treiber, who is director of ESG research at the investment provider, describes an "evolution of ESG ETFs".

"The past couple of years have been particularly interesting because there has been a massive innovation in the ETF ESG space.

"What we've seen is a lot of different types of customisation that have been done to provide different ESG exposures for clients, depending on what their value and ESG goals are," she says.

"So I think this space has certainly evolved."

Passive funds can be customised in three main ways, she says: negative screening, whereby issuers are removed from an index based on certain criteria; positive screening, where the weight of the index would deviate according to companies with higher ESG scores; and thematic ETFs, which provide highly focused exposures, allowing clients to focus on particular niche areas.

But rating the ESG assets themselves is often not straightforward, leading some to call for a ratings standard, while others argue standardising this space would stifle innovation due to its inherent complexity.

Treiber says: "When we think about ESG ratings they are very different to credit ratings... the correlation is a lot lower: it is about 0.5.

"There could be cases where let's say an investment manager is trying to incorporate ESG ratings within their investment process and depending on which ESG ratings provider they use they could come up with very different outcomes.

"I think what we are likely to see is that as the reporting requirements become more standardised, and as companies report more regularly, and we start to see a bit more standardisation across industries and sectors, what you'll see is that that'll help improve... ESG correlation and that's going to be very positive I think for ESG innovation and ESG solutions."

To hear more about ESG ratings, how advisers can offer their clients bespoke ESG in passive investments, and whether there is a risk of going 'too ESG bespoke', click on the link above.