Schwab Asset Management, the money management arm of Charles Schwab that most investors know for its brokerage and advisory platform, has partnered with Ariel Investments to launch its first proprietary Environmental, Social and Governance exchange-traded funds (ESG ETF) on November 16.
This marks a first for Schwab not only in the ESG fund space but also in the launch of its first active ETF. Active ETFs give fund managers more leeway to select investments in the fund versus passive ETFs that usually track an index.
The Schwab Ariel ESG ETF (SAEF) will focus on U.S. small and midcap stocks with a value investing lens and proprietary ESG screening.
For each U.S.-based company, Ariel creates an in-depth ESG research report including a proprietary ESG Risk Rating that is based on the company’s industry exposure, disclosure and management of material ESG issues. It will also include a negative screen by excluding firms involved in the production or sale of tobacco or firearm products, or the operation of for-profit prisons.
The Business Download spoke with two executives at Schwab and Ariel who discuss the fund, its characteristics, and outlook for ESG going forward. The interview, which was conducted in writing, follows below.
Malik Sievers, Head of ESG Strategy at Schwab Asset Management:
- Please describe briefly the new fund.
SAEF is an active, semi-transparent (also known as non-transparent) ETF that invests in small- and mid-cap value-oriented stocks that have been screened based on environmental, social, and governance (ESG) factors. The fund is sub-advised by Ariel Investments, a pioneer in ESG investing.
- What does the semi-transparent character of the fund exactly mean?
The fund may make various types of portfolio securities information available to shareholders. The fund posts a detailed list of the securities held by the fund at www.schwabfunds.com/schwabfunds_prospectus (under “Portfolio Holdings”) as of the most recent calendar quarter-end. This list is generally updated approximately 15-20 days after the end of each calendar quarter and will remain available online until at least the following calendar quarter. The fund also posts in the fund summary section of the website and on fund factsheets certain summary portfolio attributes, including top ten holdings, approximately 5-25 days after the end of each calendar quarter or month. The fund may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the fund.
- Why Ariel?
- Why did Schwab wait until now to launch its first ESG fund?
Schwab and Ariel are addressing a gap in the market. By collaborating with Ariel, we are delivering a fund managed by two leading firms with unparalleled ESG and ETF capabilities to offer investors: access to value-oriented, small- and mid-cap U.S. equities with rigorous ESG screening and deep fundamental analysis.
- What is your outlook for ESG?
This is an exciting area. Investing with one’s values is becoming increasingly important to investors, especially younger people. If ESG is the catalyst to get investors to engage earlier and stay invested, that’s a great outcome! There will be more to come from Schwab related to ESG and helping investors by offering education, access to third-party funds, and now through our own proprietary fund.
Ken Kuhrt, Executive Vice President, Co-Portfolio Manager at Ariel Investments:
- What do Ariel ESG risk ratings focus on or exclude?
Ariel’s active ESG analysis encompasses a more thoughtful approach. Ariel considers multiple factors versus relying solely on third-party ESG rating systems or historical company metrics. Strategies that rely solely on third-party rating systems or historical company data may not provide the same opportunities as an actively managed ESG approach. Ariel consistently engages with portfolio company management teams to address ESG issues deemed material to long-term financial health.
As it relates to active small and midcap ESG approaches, we’ve found that inefficient asset classes provide an opportunity to add value given small- and midcap stocks are not widely covered by sell-side firms. Our proprietary ESG risk ratings are informed by assessments of industry exposure, disclosure, and management of material ESG issues.