State street global advisors creates low carbon, high ESG index fund for Australian institutions

In response to growing demand from Australian institutional investors for environmental, social and governance (ESG) investment options, State Street Global Advisors, the asset management arm of State Street Corporation (NYSE:STT), in partnership with MSCI, has created a low carbon, high ESG international equities fund.

The State Street Low Carbon ESG International Equities Index Trust is the next phase for an index fund launched 18 months ago by State Street Global Advisors, which initially screened out companies involved in tobacco and controversial weapons.

The firm is changing the fund’s index to one which, relative to the MSCI World ex Australia index, reduces carbon emissions and reserves intensity by 50 percent, as well as targeting a 20 percent improvement in its overall ESG profile.

The fund, valued at AU$229 million as at 28 February 2018, will track the MSCI World ex Australia Select ESG Low Carbon Integrated Index (the Index) which is biased against companies most highly exposed to carbon price changes.

“The world is shifting towards a low-carbon economy and institutional investors are increasingly reassessing their portfolios to make sure they’ll be on the right side of that global trend,” said Susan Darroch, head of Global Equity Beta Solutions, Asia ex Japan, at State Street Global Advisors.

The Index also allocates higher weightings to companies with better overall ESG profiles based on a range of criteria and excludes: tobacco; controversial weapons; nuclear weapons; and “red flagged” stocks that do not adhere to international norms and principles such as the UN Declaration of Human Rights.

“While many larger institutions are of sufficient size to have customised, low carbon/ESG mandates, other institutions are looking to achieve the same exposure via a low-cost indexed fund.

Our clients want the ESG outcome, but to avoid significant deviations in country and sector allocations when compared to the broader market index. There are less than a handful of existing options to do this locally,” continued Darroch.

As one of the world’s biggest investors, with US$2.78 trillion under management as at 31 December 2017, Darroch said State Street Global Advisors is also committed to engaging with portfolio companies on issues such as climate change and gender equality that impact long-term value creation.

State Street Global Advisors has more than 30 years of experience in ESG investing globally, with approximately US$207 billion in ESG assets under management as at 31 December 2017.

These strategies offer the full spectrum of solutions, from traditional screened portfolios to ESG-themed portfolios which seek alpha.

Last September, State Street Global Advisors announced it was divesting tobacco and controversial weapons shares held in its AU$1,067m State Street Global Index Plus Trust in response to demand from its Australian investors.

The move striped 12 companies from the Fund’s investment universe that have significant business activities involving tobacco and making cluster bombs, landmines, chemical and biological weapons and depleted uranium weapons.