The benefits of an active ETF for ESG investors

The up-and-coming launch of an active ETF with an ESG framework plugs a gap in the market and allows portfolio managers to talk directly to companies about ESG strategies


ESG (environmental, social, governance) investors have often been challenged by the limited number of ESG-related exchange-traded funds (ETFs) available in the market, as well as by the lack of investment flexibility offered by these passively-managed ETFs.

While actively-managed ETFs are available, an actively-managed ETF with an ESG component is still relatively uncommon.

To address this challenge, J.P. Morgan Asset Management (JPMAM) is launching an active ETF with an ESG framework at the London Stock Exchange (LSE) on October 16.

"We're taking this active management approach and we're then introducing an ESG framework. We think that ESG is growing and very important to investors," says Byron Lake, managing director and head of International ETF at J.P. Morgan Asset Management, in an interview with The Asset.

Lake explains that JPMAM's ESG framework comprises two different components. The first component is ESG integration, whereby portfolio managers gather ESG-related information and include this information as part of their asset allocation strategy.

"Human beings run these funds. They get all this additional information around ESG issues, which they can take into account when they're thinking about different securities. They can incorporate that into the decision-making process when they look at the different securities," Lake says.

The second component of the framework is that the portfolio manager can be proactive in terms of talking directly to the companies that they invest in about their ESG policies and strategies.

"They can actually engage and advocate with the companies directly. They can meet with senior leadership of those individual companies and help advocate for improved ESG behavior, which we think is very unique and something an index, quite frankly, can't do. So those pieces are the baseline for ESG integration," Lake says.

In addition, the ESG-related ETFs have exclusions such as controversial weapons, thermal coal, and tobacco companies.

"So active management with an ESG framework, which we think is extremely thoughtful, and then delivered through the ETF wrapper with all the benefits that come with that. We think this is a very innovative and unique investment proposition that investors have been looking for. We're also delivering it at a very, very attractive price. They're going to be all 25 bps (management fee)," Lake says.

The ETF will be launched in an Undertakings for the Collective Investment of Transferable Securities (UCITS) format, which also makes it available to all investors worldwide.

Lake also brushed off concerns that ETFs have grown too fast, too soon and that this may lead to an asset bubble.

"I hear that one a lot. First of all, we need to remind interested parties that ETF is just a wrapper so you can equally get exposure to US equities as you can US treasuries. When considering a bubble scenario in an asset class, it doesn't make sense because you can get exposure to all different asset classes in an ETF," Lake says.

Also, Lake cites that the global ETF industry is now US$5 trillion in total assets, which is just equivalent to the total AUM of FANG (Facebook, Amazon, Netflix, Google), therefore is still relatively small.

Lake also stresses that the ETF wrapper, as an investment tool, has withstood the test of the global financial crisis, the technology crisis, and other stresses in global financial markets.

"These were times when the infrastructure of the financial markets was tested. Through all of that we found that the ETF wrapper held up and was extremely robust," Lakes says.


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11 Oct 2018


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