The recent launch of the European Commission (EC) sustainable investment framework and the new guidelines around environmental or social objectives (EOS Priips) to ensure that investment products meet retail investors' needs, as well as the launch of dedicated venues such as the Luxembourg Green Exchange (LGX), shows the increasing shift from product manufacturers and investors towards ESG strategies. However, this will only "help to bring standards to the segment", according to Andreas Feiner (pictured), head of ESG research and advisory at Arabesque
"The growth will only come as the offering evolves and investors demand new products," says Feiner. "There is a degree of education still needed, as there are many people that still think that SRI or ESG is still just about negative screening, but it is swiftly changing."
The firm behind Arabesque S-Ray which has a partnership with Deutsche Bank to develop a range of ESG based structured products entered the US market earlier in May with the launch of the Arabesque Systematic USA fund, a fund that applies Arabesque's Systematic strategy to all publicly listed US equities.
"We have a number of investors committing capital to the fund, following our partnership with Gitterman Wealth Management as a seed investor, so we are confident the fund will continue to grow in assets under management (AuM)," says Feiner, adding that the firm's strategy in the US market is "partly based on making inroads via the US registered fund vehicle, which is mainly used by Registered Investment Advisors (RIAs), and serves mass affluent and high net worth individuals".
"RIAs use model portfolios and are increasing the weight of ESG and sustainable strategies in their portfolios," he says. "We think we can add value in this growing market in the US as more RIAs move to increase the ESG exposure of their clients' portfolios, seek to differentiate themselves from the big houses, and deliver something that is ESG relevant and provides alternative sources of yield."
According to Feiner, overall, the market is seeking to provide "real value" through ESG without compromising performance, and Arabesque wants to leverage its capabilities as investment capital transitions towards the ESG segment.
"We believe Arabesque S-Ray (the firm's tool to monitor the sustainability of over 4,000 of the world's largest corporations) will become instrumental to help us achieve our vision of reallocating capital from companies that are not meeting the requirements of the UN Compact Principles to those which are," says Feiner. "It has the power to move money from the bottom of the ESG value chain to the top, helping investors to take action, and requiring corporations to think about their future place in that value chain."
This shift will take some time, but attitudes towards ESG issues are changing, "akin to how public opinion quickly changed around the smoking ban from something that was first unthinkable to now being the norm", according to Feiner.
"I truly believe it is the future," he says. "These things happen faster than you think. We are used to linear thinking but real change happens exponentially, and ESG is experiencing an exponential change."
According to Feiner, Arabesque is expanding its offering and is targeting institutional investors that are shifting some of their exposures to ESG and sustainable assets. "We have had conversations with a number of leading wirehouses, and although there is no free ride when offering your products on these platforms, we believe there is an opportunity to promote this segment and make our products more accessible," he says. "The next step for us is to enter the segregated managed account (SMA) space, as we think this segment has significant potential for our strategies as ultra-high net-worth individuals and institutional investors are now fully aware and demanding sustainable products and strategies for those SMAs."
The ESG specialist firm is already transacting products on a bilateral basis with Deutsche Bank, and is hoping to grow the product range as it moves forward with the partnership, according to Feiner. "The goal is to reach a critical volume in terms of assets in order to have a solid foundation to develop further products," he says. "I cannot disclose any figures at this stage but we are on track to reach our targets and will be making new announcements in Q3."
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