European Equity ESG: Changing with the Times

In response to industry developments and demand from investors, we have changed the benchmark for our European equity ESG ETF. The fund offers access to the SRI methodology for STOXX Europe 600, a key investor benchmark. STOXX Europe 600 SRI adds best-in-class ESG scoring and carbon considerations to exclusions.

ESG investing in Europe is evolving at a tremendous pace

As industry veterans we see the speed of development in ESG – the meaning, the analysis, the demands on companies as the recipients of capital, the regulatory requirements and the ask of investors to evolve at a pace unlike anything we have seen in asset management.

At SPDR, and with the full resource of State Street Global Advisors, we are embracing this critical evolution. To this end, we are changing the benchmark for what was our first ESG ETF launch. We have adopted a combination of product and norms-based exclusions and best-in-class ESG scoring within other SPDR products and now we are offering it with European equities.

Why Europe?

European equities represent one of our favoured investment areas. The region’s valuation attractions, sectoral bias and stage in the economic cycle all support this preference. While new waves of COVID suggest a more cautionary approach should be taken, any price weakness may feed the “buy the dip” mentality of investors looking to add to their exposure. 

The European region has the advantage of being well ahead of the rest of the world in its ESG vision. Central to this vision is the role of the European Union in driving disclosure, regulation, taxonomy (particularly on the environmental front) and investor mindset toward sustainable investing.

Moving from screening to inclusion

As demand for ESG investment has grown, the approaches to ESG investing have become more sophisticated and the responsible ambition of many of our investors has increased. This evolution comes amid a willingness to accept more risk in order to gain more traction on ESG exposure.

The asset management industry and index provision have similarly developed apace. The first ESG phase began some years ago by looking at solutions for negative screening. Indices had typical exclusions based on controversial weapons, tobacco, coal and the UN Global Compact principles. At this starting point, there was broad agreement that this approach constituted an ESG methodology at the base level. 

In a second phase, index providers, such as our partner STOXX, have been adding ESG integration and positive screening methodologies to their suites. This means incorporating ESG scores that enhance the risk-return profile of the index and including companies that are best-in-class on an ESG basis by sector. Needless to say, this comes with a higher tracking error to parent indices.

The SPDR STOXX Europe 600 SRI UCITS ETF (previously SPDR STOXX Europe 600 ESG Screened UCITS ETF) has a new benchmark that incorporates additional screens, including high carbon emissions, reflecting some of the more stringent European labels of a socially responsible investing approach.* To learn more about the ETF, please visit its fund page.

To read more about this ETF and the index it tracks, we invite you to read our latest Insights article.