State Street Global Advisors has launched a passive fund based on the MSCI World Select 5-Factor ESG Low Carbon Target Index.
The asset management arm of State Street Corporation announced the launch on Monday, confirming that it will sit within the company’s Authorised Contractual Scheme (ACS) range.
The MSCI World Select 5-Factor ESG Low Carbon Target Index integrates ESG metrics and two dimensions of carbon exposure (carbon emissions and fossil fuel reserves). It is composed of securities showing an improving ESG profile and those that show a reduction in carbon intensity. The index is focussed on five factors: Value, Size, Volatility, Quality and Momentum.
Ana Harris, head of Equity Indexed Strategies at State Street Global Advisors, explained that the launch was in response to an increased demand for good returns that are generated while being mindful of risk.
She explained: “ESG considerations are becoming an imperative, both from an aspirational point of view but also because of the potential cost impact of ESG-related risks.
“Broader stakeholders and regulators are also taking a keener interest in these topics and encouraging asset owners to take action.”
In launching the product, SSGA endorsed using a multi-factor smart beta approach, but warned investors to look closely at such strategies, noting that a value stock may benefit from enhanced returns during the market cycle, but may not necessarily improve the ESG profile of the strategy.
“A careful bottom-up portfolio construction process, which utilises optimisation, is a necessary element to ensure any trade-offs are well managed and that both factor and ESG exposures are attained most effectively,” Harris explained.