Are UN Sustainable Development Goal ETFs fit for purpose?
The goals look ready-made for thematic funds, but can they be properly aligned to an investment framework?
By Theo Andrew
The Sustainable Development Goals (SDG) continue to capture the imagination of ETF issuers but questions have been raised about the ability to properly align them to an investment framework.
Used by both active and passive funds, they were thrust into the spotlight again in January after DWS launched a seven-strong range of thematic ETFs targeting the SDGs it believes “present a growth story”.
Other ETF issuers have also launched products tracking SDGs, albeit not so inextricably linked to the goals, including the L&G Clean Water UCITS ETF (GLUG), the iShares Global Water UCITS ETF (IH20) and the BNP Paribas Easy ECPI Circular Economy Leaders UCITS ETF (REUSE).
The goals comprise 17 interlinked objectives, including no poverty, zero hunger and clean water and sanitation, which aim to serve as a blueprint to advance global progress for “peace and prosperity” for the planet.
However, while offering a strong narrative to pitch to investors, many have questioned the validity of using the SDGs as an investment framework.
Kenneth Lamont, senior fund analyst at Morningstar, said he understood some of the concerns around using SDGs as an investment framework but added it was part of a broader problem around impact investing with ETFs.
“The question mark hanging over SDGs is part of the broader question of whether you can use ETFs to invest impactfully. Investors need to be able to measure that impact, that is the goal of the investment,” he said.
“Generally, it is questionable whether investors can ever have a real impact by investing in listed stocks.”
Stuart Forbes, co-founder at Rize ETF, agreed, adding the SDGs were not designed for public or private market investment.
“The way the goals are measured is through a series of indicators such as decreasing deforestation and habitat loss. It would be almost impossible to assess a company’s contribution to forestation in Brazil or Indonesia,” he said.
“The further you go with SDGs from an investment and thematic perspective, it is just not possible to align.”
Forbes said Rize ETF explored the idea of launching products linked to the goals, looking at SDG alignment tools, but that they “just do not make any sense”.
“Looking at what the funds are holding, they are almost all developed market economies, they are not servicing an underserved region of the world or having a significant social impact,” he added.
For example, DWS uses MSCI’s SDG alignment tools designed to provide a “holistic view” of companies’ net contribution towards addressing each of the SDGs.
However, Lamont added the thematic element of the SDGs is what makes them attractive. For example, he noted GLUG’s thematic approach, investing in companies’ infrastructure and technology.
“I find GLUG interesting because it does focus a lot on water technology. It is a completely different set of stocks that are actually trying to solve the problem. It is much more of a thematic approach than the traditional water sector fund.”
DWS also includes a thematic element to its SDG range, with sustainable revenue accounting for 75% of the MSCI indices it tracks, while the remaining 25% will be calculated using forward-looking thematic metrics.
Speaking to ETF Stream ahead of the launch in January, Olivier Souliac, senior Xtrackers product specialist at DWS, said it chose not to do all 17 SDGs due to the inability to align them all within an investment framework.
“The reason we have a revenue-based approach is that some of the SDGs such as zero hunger and education can only really be filled by society and governments and are not themes in the sense of being growth stories,” he said.
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