Northern Trust ’s FlexShares has rolled out a new suite of ETFs providing low-cost core portfolio exposures with improved ESG scores and reduced carbon risk compared to traditional broad market benchmarks. Chris Huemmer, Senior Investment Strategist for FlexShares ETFs.
Listed on NYSE Arca, the suite consists of two equity ETFs providing exposure to US and developed ex-US large-cap stock markets, as well as two fixed income ETFs targeting US dollar-denominated investment-grade and high-yield corporate bonds.
The funds and their expense ratios are as follows:
FlexShares ESG & Climate US Large Cap Core Index Fund (FEUS US); 0.09%
FlexShares ESG & Climate Developed Markets ex-US Core Index Fund (FEDM US); 0.12%
FlexShares ESG & Climate Investment Grade Corporate Core Index Fund (FEIG US); 0.12%
FlexShares ESG & Climate High Yield Corporate Core Index Fund (FEHY US); 0.23%.
Each ETF tracks a proprietary index that begins its construction process from one of Northern Trust’s traditional market-cap-weighted benchmarks.
The methodology first eliminates violators of UN Global Compact principles and companies that are involved in weapons, tobacco, or thermal coal.
Each index then utilizes an optimization process to select and weight securities in order to boost its ESG profile (as measured by Northern Trust’s proprietary ‘ESG Vector Score’) and reduce its aggregated climate-related risk (as measured by Institutional Shareholder Services’ ‘Carbon Risk Rating’) while maintaining similar risk characteristics as its parent universe.
The ESG Vector Score relies on a framework established by the Sustainable Accounting Standards Board (SASB) that evaluates how well a company is managing financially material ESG risks specific to its industry. Four-fifths (80%) of the ESG Vector Score is determined by environmental, social capital, human capital, business model, innovation, and leadership factors. The remaining 20% is determined by a distinct governance score with respect to board and management quality, board structure, ownership and shareholder rights, remuneration, financial reporting, and stakeholder governance.
The ISS Carbon Risk Rating accounts for a firm’s current carbon emissions, its fossil fuel reserves, its efforts to reduce its carbon footprint, and its potential exposure to carbon risk relative to other companies in its industry.
The constraints imposed on the optimization process include limiting the deviation in country, sector, and individual constituent weights relative to the parent universe. For the fixed income indices, the optimization also controls the portfolio’s effective duration and option-adjusted spread relative to the parent universe.
Reconstitution and rebalancing occur quarterly.
Christopher Huemmer, Senior Investment Strategist for FlexShares ETFs, said: “The combination of our ESG Vector Score and carbon risk rating creates a complementary strategy to identify sustainability leaders and laggards in each sector in a consistent way. In response to heightened client demand for climate investing, we created this new suite to offer core investment strategies that we believe are better positioned to benefit from the ongoing transition to a low-carbon economy.”