Northern Trust鈥檚 first European ESG ETFs will not lend securities
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Northern Trust鈥檚 first European ESG ETFs will not lend securities 03 March 2021US Reporter: Drew Nicol
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Northern Trust Asset Management鈥檚 first European exchange-traded funds (ETFs) will not lend their assets, for now.
The investment management firm has expanded its FlexShares ETF brand into Europe this week with two funds tracking environmental, social and governance (ESG) indices.
The FlexShare Developed Markets Low Volatility Climate ESG UCITS ETF (QVFD) and the
FlexShares Developed Market High Dividend Climate ESG UCITS ETF (QDFD) are the first of several European funds set to launch in the coming months.
However, unlike their US counterparts, both ETFs have been excluded from the Northern Trust鈥檚 securities lending programme which brought in $88 million in 2020.
A Northern Trust spokesperson tells SFT that the ETFs could support securities lending and a decision on the matter would be made once the funds鈥� assets under management (AUM) increases.
鈥淲e would consider it [securities lending] if it was an attractive addition to the shareholders and consistent with the investment strategy of each product, and once the funds reach a certain mass,鈥� the spokesperson says.
Northern Trust鈥檚 FlexShares has established a range of 27 US ETFs since launching in 2011. Two of the 27 track sustainable indices, with combined AUM of more than $340 million. Both have active securities lending programmes.
Both funds are weighted towards household names in US technology, consumer and entertainment sectors and feature Tesla, Facebook and Disney among their top-10 holdings.
The European funds
Northern Trust's FlexShares partnered with index provider STOXX to develop benchmarks for QVFD and QDFD.
QVFD is a low-volatility fund featuring stocks that exhibit lower overall absolute volatility cash flow, combined with quality and ESG to maximise quality, improve ESG ratings and create minimum variance, says Northern Trust.
It tracks the iSTOXX Northern Trust Developed Markets Low Volatility Climate ESG Index, which has a heavy focus on the US technology sector.
QDFD is an income fund featuring stocks that exhibit a high potential to generate income, combined with quality and ESG to maximise quality, improve ESG ratings and enhance dividend yield, the firm says.
It tracks the iSTOXX Northern Trust Developed Markets High Dividend Climate ESG Index.
As FlexShares expands its , it will look for opportunities to develop new proprietary benchmarks best suited to its products and investor needs, Northern Trust says.
The ETFs are listed on the London Stock Exchange and EuroNext and are available in the UK, Ireland, Sweden, Germany and the Netherlands.
Why some ESG ETFs aren鈥檛 lending
As the ESG surge intensifies, the securities lending market has found itself pulled into a debate on whether the business should strive to promote sustainability characteristics or act as a neutral, secondary activity.
Other recent ESG ETF issuers such as HSBC Asset Management and DWS are so far unable to square to circle of making securities lending and their sustainability agendas compatible.
Last month, HSBC announced it was restarting its ETF securities lending programme after nearly a decade but would not include its seven ESG ETFs in the pool of available assets.
In December, DWS, a German asset manager, pulled a small ETF out of its lending portfolio as part of its transition to tracking an ESG index.
Investment allocated to sustainable-focused ETFs tripled in 2020 to an all-time high of $189 billion in AUM, according to TrackInsight, and the securities lending market will want access to this growing pool of growth-market assets. So, what鈥檚 going on?
The International 网爆吃瓜 Lending Association鈥檚 CEO Andy Dyson suggests the problem stems from the lack of clear definitions of what constitutes an ESG-friendly product.
Dyson tells SFT that asset managers are keen to be seen as taking a leading position in the move into sustainable financing but the ambiguous terminology and absence of regulatory oversight means they are erring on the side of caution when it comes to features such as securities lending.
The level-one requirements of the Sustainable Finance Disclosure Regulation (SFDR) come into effect on 10 March and represent EU regulators鈥� first attempt at standardising ESG principles but it still lacks any granularity on what constitutes ESG.
The securities lending market is awaiting feedback from the European Commission on what is meant by a product that 鈥榩romotes鈥� ESG characteristics, as set out in SFDR, as this will largely dictate whether lending programmes are brought in-scope of the disclosure requirements. A reply is expected before 10 March.
Set against this backdrop we have seen several asset managers deciding not to lend ESG portfolios. If this is anything other than a temporary pause in lending we will see progressively less liquid markets in these securities with inefficient price discovery and declining support for broader market liquidity which will lead to wider bid-offer spreads.
Furthermore, Dyson states that the market has consistently seen that where funds lend securities and plough revenues back into the fund, retail investors see lower fees when compared to those funds that do not lend securities.
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