Lack of innovation in fixed income ESG ETFs leaves European investors cold

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New research from specialist fixed income ETF provider Tabula Investment Management has revealed that European professional investors want to see more innovation in fixed income ESG ETFs.

Tabula has recently signed the UN-supported Principles of Responsible Investment and is keen to understand and incorporate the views of investors as it implements those principles.  

The company's research found that 96% of investors surveyed are already using ESG ETFs, something that Tabula CEO Michael  Lytle calls "a remarkable level of penetration in only a few years".

"However, in fixed income specifically, the vast majority of respondents want to see more innovation, broader coverage of exposures and more transparency around the effect of the fund's approach," he said

Exclusion

Specific features that professional investors look for in ESG ETFs include calls for the exclusion of the most harmful companies by over 70% of respondents. 

The survey also revealed an preference for out-performance potential over benchmark tracking.

"The exclusion of certain companies - for example, those violating the UN Global Compact or manufacturing controversial weapons - is becoming a minimum requirement," said Lytle. "This is a great starting point but not the whole story.

"Many existing ESG ETFs are designed to closely track traditional benchmark indices. However, 75% of our respondents saw out-performance potential as important, compared to 25% preferring to minimise tracking error.

Performance 

Lytle points that'll this could indicate that investors are now seeing ESG as a driver of long-term performance, not just a qualitative overlay. This ties in with strong demand (63% of respondents) for more targeted products focused on issues like climate change and diversity, he added

"Responsible investing is evolving rapidly," said Lytle. "This research gives us valuable insights into the broad trends and, crucially, the different views and priorities across countries and investor types. Creating innovative ESG ETFs that meet investor needs is a challenge for providers and one that Tabula is actively embracing."  

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Gary Robinson

Commercial Director, Head of Video at International Investment.

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