New Strategy Needed for 'ESG ETF'... Focus on 'Active Management'

[Asia Economy Reporter Lee Seon-ae] Kiwoom Securities has predicted that as ESG (Environmental, Social, and Governance) emerges as a major topic in the financial market, a new strategy is needed for the ESG Exchange-Traded Fund (ETF) market.

According to Kiwoom Securities on the 31st, within the ESG ETF market, the integration strategy still holds the largest share among sustainability-type attributes, but since COVID-19, sustainability-themed investing has been growing rapidly, and the combination with other innovative new themes is also expanding.

Jinyoung Kim, a researcher at Kiwoom Securities, said, "Among various theme combinations, the recently launched ETF focusing on corporate engagement (Engine No. 1 Transform 500 ETF (VOTE:US)) has attracted attention," adding, "As ESG risk management in corporate governance becomes more important, attention should be paid to the fact that investing in the VOTE ETF allows indirect encouragement of companies toward ESG management."

The Engine No. 1 Transform 500 ETF is the first ETF launched by Engine No. 1, a U.S. activist hedge fund well known for its activism. It attracted significant attention even before its launch because Engine No. 1's active engagement case against ExxonMobil had been in the spotlight. In May, Engine No. 1 secured multiple new board seats at ExxonMobil. Among the four newly appointed directors, three were climate change experts, all recommended by Engine No. 1, and during this process, they gained support from several asset management firms such as BlackRock and proxy advisory firms like ISS. It was a recent significant change that a hedge fund with assets under management of about $250 million exerted influence over ExxonMobil, a major U.S. corporation, and that a hedge fund, which prioritizes returns, emphasized non-financial factors like ESG.

Engine No. 1's next move was the launch of the VOTE ETF on June 22. Engine No. 1 claims, "If we can change the 500 largest companies in the U.S., the entire U.S. economy will change," and asserts that investing in the VOTE ETF allows participation in this wave of change.

The underlying asset of VOTE, the Morningstar U.S. Large Cap Index, is a broad index composed of 500 large-cap U.S. stocks. On the surface, it looks no different from existing ETFs investing in U.S. large-cap stocks. In fact, its price movements are almost identical to the S&P 500 index. However, Engine No. 1 differentiates itself by monitoring whether the 500 U.S. large-cap stocks in the tracked index uphold ESG values well and by actively engaging in corporate governance. In other words, it applies proxy voting guidelines to encourage innovative changes in the invested companies. Therefore, Engine No. 1's ESG strategy does not use the negative screening (exclusion strategy) commonly employed by ESG funds. Instead of excluding companies that do not meet ESG standards from investment, it holds shares in companies and exerts influence to help them meet ESG criteria through active strategies.

Since COVID-19, cases of ESG management participation have increased sharply, and corporate perceptions toward this have also changed. For example, according to BlackRock's proxy voting report released in July (Pursuing long-term value for our clients), BlackRock has been more actively involved in corporate governance related to ESG issues over the past year (July 1, 2020 ? June 30, 2021). In particular, it voted against the appointment of 255 directors from companies neglecting climate response (compared to 55 in the previous period from July 1, 2019 ? June 30, 2020) and against 319 management-related proposals (compared to 53 a year earlier). This is a significant increase within one year.

Additionally, during the previous survey, BlackRock announced it would monitor 244 companies that were not actively responding to climate risks, and in this year's report, it stated that about 54% of these companies showed meaningful progress this year. This reflects that asset managers' proxy voting and pressure are leading to actual behavioral changes in companies.

Researcher Kim emphasized, "Going forward, proxy voting by asset managers and asset owners is expected to strengthen further, and this is a very important issue within the ESG market," adding, "The purpose of ESG investment is to ensure that the environments we live in change to align with ESG values, and shareholder activism plays a significant role in this."

Meanwhile, recently BlackRock decided to expand direct voting rights to large institutional investors such as pension funds and university endowments, which are among its largest clients. Until now, institutional investors had delegated proxy voting to large asset managers like BlackRock, but now the voting rights will be returned to the institutional investors. Accordingly, large institutional investors investing in BlackRock products will be able to exercise direct voting rights over about 40% (approximately $2 trillion) of the index equity assets managed through institutional investor accounts, totaling about $4.8 trillion. This measure is scheduled to be implemented starting next year.

This content was produced with the assistance of AI translation services.