How to give your core allocation an ESG makeover

20 October 2022

AssetDataESGGatekeeperGatekeepersNet ZeroThematic investment

Expert: Vincent Denoiseux Facilitator: Sianne Haldane


  1. ETFs are a stable ESG asset class to include in your overall allocation
  2. There are different choices available on ESG thematics/ indexes depending on themes you may want to pick e.g water


ETFs are a growing asset class - outflows from Active funds being allocated to ETFs, cost effective solution for investment - once constructed as a passive fund, generally easy to manage - and returns in line with other passive funds. Are looking to include ETFs as asset classes though. Looking for greener/ dark green (SRI- seems greenest).

Is cost effective because once have constructed the index, index-based portfolio are scalable and cost-efficient to manage.

There is more than 1 data provider in this space (S&P Global - Trucost, MSCI and others) - Amundi is the largest ETF European provider - constructs indices with leading data providers and ETFs listed on LSE, Euronext Paris etc.

Looking at net zero transition as an assessment of companies based on their decarbonization efforts and their development of sustainable activities, with the objective of the portfolio having a transition profile better than that of its universe.

Growing range of ESG solutions in ETF space and investment cases based on ESG leaders in different jurisdictions e.g: MSCI Japan ESG Leaders; MSCI Europe ESG Leaders, MSCI USA; Bloomberg Euro Aggregate SRI, MSCI World SRI PAB - can use this type of approach to create index.

Considering transition to Net Zero as a key theme - can track these investments against net zero targets - considered a light green investment - ESG at the core. Relatively small risk in using these indices - most data / reporting linked to Paris Aligned benchmark - fosters the use of this index- transition.

Companies making a commitment to continuously reducing their emissions - the index would be in breach if they don't meet targets.

Fostering positive behaviour - the most tangible index. Other themes include - water/ sustainable cities/ Gender equality/ etc.

Also - could choose if you want to focus on S&P 500 as a core index - depends on where/ how you want to focus/ Set of responsible ratings  -  this could become the core rating over time rather than ESG themes as the universe grows (currently excluding stocks, arms, tobacco, thermal coal, controversial oil and gas, so still excluding companies).

Once filtered (according to theme etc and exclusions) create a good benchmark - high correlation looking at ESG improvement over time across firms vs risk. Higher tracking error can correlate with higher impact.

Key takeaways:

  • Those wanting high impact are still wondering if it is possible to create this through ETFs.
  • How do we measure impact? Look at MSCI World index - cost of capital can reduce as if you are selected on an index from investor perspective
  • EU regs PAB and CTB the regulators intro index rules - creates flow of capital/ agreed benchmark / core benchmark impacts stock price - as a co -want to be in core index, forces execs to align - show impact
  • Big Polluter, the cost of finance will increase - creating real world impact
  • Co2 emissions - Environmental themes seem to be key here and can create tangible impact in ETF space