New ESG ETFs have been springing up like mushrooms as of late. In recent news, Avantis Investors, a subsidiary of American Century Investments, launched its first multi-factor equity ETFs that focus on socially responsible investments.
Avantis Responsible US Equity ETF (AVSU) and Avantis Responsible International Equity ETF (AVSD) are actively managed – meaning they don’t track a specific index. AVSU focuses on U.S. stocks that fulfill ESG criteria, while the AVSD invests in ex-U.S. companies with similar goals.
Both funds select stocks across various market sectors and industry groups, eliminating those that do not fit their ESG screening criteria. Avantis uses third-party ESG data services such as MSCI and Sustainalytics and proprietary methods.
Companies that are excluded are those that have more than 5% in revenue in industries like the manufacturing of chemical, biological or nuclear weapons, factory farming, gambling, tobacco or cannabis production, and adult entertainment. In addition, the fund managers also exclude firms with revenue from thermal coal, those that rank in the bottom 5% regarding carbon emissions intensity, companies with no female members on their boards, and those with low corporate governance scores, as well as those involved in ESG controversies.
In separate news, BNY Mellon launched a responsible investment active fixed income ETF, sub-advised by Insight North America, part of BNY Mellon investment firm Insight Investment. BNY Mellon Responsible Horizons Corporate Bond (RHCB) is focused on generating income and capital appreciation by investing in corporate debt securities that have been screened using Insight’s proprietary ESG rating methodology called Prime.
This fund is BNY Mellon’s sixth actively-managed and fourth dedicated sustainable solution that will be selecting companies that demonstrate attractive investment attributes and business practices.
“This is the first time that Insight has offered US ETF investors access to its ESG expertise,” said Svein Floden, head of intermediary distribution at Insight. “Responsible Investment is central to our philosophy and culture. We believe that our proposition is compelling and should stand out in a market where few products approach responsible investment via fixed income. We look forward to developing this product set for US investors.”
KraneShares ETFs, specializing in ESG/Impact and thematic ETFs, launched KraneShares Global Carbon Transformation (KGHG). The actively managed ETF seeks to invest in low-carbon leaders of the future. These include firms that are not high-emitting industries but are proactively focusing on carbon transformation. Emerging decarbonization leaders have developed specific commitments and demonstrated their actions toward decarbonization.
“Carbon transformation spending will drive the biggest capital cycle the world has ever seen,” noted Roger Mortimer, the ETF’s portfolio manager, in a recent white paper. “McKinsey & Company estimate that the total investment required to achieve net-zero by 2050 is $275 trillion, with annual capital spend on energy infrastructure expected to jump more than 50% from current levels. This is a magnitude of spending not seen since the industrial revolution of the 1780s. The sectors that are direct contributors to global emissions and subject to the net-zero objective comprise at least 20% of global GDP.”
While investors have been flooded with an array of ESG investment opportunities, there’s still a lack of standardization regarding ESG scores, metrics, and labeling. Mortimer pointed out that while ESG funds have seen huge retail capital flows over the past couple of years, it still remains a relatively nascent category.
“As ESG flows mature, investors will seek out alpha-generating strategies,” he said. “Energy transition offers tremendous potential for superior growth and revaluation. Companies that provide transparency around decarbonization capital allocation, key emissions metrics and showcase growth (even if it requires spin-outs) will achieve higher valuations.”