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Q&A: UniCredit’s Kilian on ESG+Factor Strategies

Jul. 30, 2019

Jul. 30, 2019

Oliver Kilian, UniCredit.

Today UniCredit Bank AG, via its subsidiary Structured Invest SA, introduced two exchange-traded funds (ETFs) based on the Eurozone’s first set of indices combining a factor strategy with environmental, social and governance (ESG) criteria on European equities.

The funds track the EURO iSTOXX® ESG-X & Ex Nuclear Power Multi Factor Index and the EURO STOXX® ESG-X & Ex Nuclear Power Minimum Variance Unconstrained Index. The first of these indices is designed to exploit sources of market-excess returns, so-called risk premia, while filtering out companies deemed in contravention of ESG principles. The second one takes the same responsible approach while seeking to lower the portfolio’s volatility.

Both indices combine two strong investment trends that have garnered growing assets and momentum in recent years: sustainability-based strategies on one hand, and the passive and systematic exploitation of risk premia on the other.

Companies deemed in contravention of the United Nations Global Compact principles or active in controversial weapons, tobacco, thermal coal and nuclear energy, are screened out, meeting the standard sustainable policies of investors.

The multi-factor index seeks to diversify across the following sources of risk premia: profitability, earnings yield, leverage, value and low volatility. The EURO STOXX ESG-X & Ex Nuclear Power Minimum Variance Unconstrained Index tracks stocks that have exhibited the lowest individual levels of historical volatility but is optimized to account for sector and country biases and intra-stock correlation to avoid unwanted exposure and style concentrations.

Find out more about the indices here

To learn more about the ETFs and demand for their strategies, we caught up with Oliver Kilian, a Director within UniCredit’s ETF Advisory & Trading unit. 

 

Oliver, what is the objective and rationale behind the launch of these ETFs?

UniCredit has accumulated considerable experience in creating and calculating our own strategies and indices that can be wrapped in any format – such as an ETF. We also have a clear strategy of not seeking to launch ETFs on blue-chip or other standard indices, but rather to focus on niche products.

What type of investor, asset owner or portfolio manager would be attracted to such strategies?

Our research indicated that investors with a strong ESG bias are not currently able to invest in recognized risk-premia indices to benefit from their exposures. Our new ETFs seek to change that.

The two products target institutional investors who want to meet ESG investment criteria – filtering out companies that don’t comply with these principles through exclusion screens. In doing so, we are of course responding to the demands of our clients, but we want to make these products available for all kinds of investors – including retail. 

You have chosen a base universe with negative ESG exclusions as opposed to a best-in-class ESG base universe as an underlying for the strategies. Why?

When creating such a product with more than one investment dimension, there is a trade-off: either one focuses only on the ESG component with a best-in-class approach and misses out on performance, or one emphasizes the performance component. With negative ESG exclusions, we are choosing a mix of the two approaches. We exclude sectors and companies that do not comply with ESG principles, while maintaining the performance of the index concept.

What is the result of combining an ESG-screened base universe and a factor-based stock selection?

The results we achieved with these new indices were quite astonishing. We are not only outperforming regular benchmark indices but offering the same or even better performance compared to standard factor indices.

The combination of ESG and smart beta is emerging as an innovative option. Will such solutions become a niche sector, or can they become an important pillar of passive portfolios?

In the long run, we anticipate a trend where most asset managers will be looking for ESG-compliant impact investment across the board. It is only logical that smart beta will also become a standard tool offering alternative exposures with the same ESG standards.

What are the benefits of running these strategies with a passive methodology as opposed to an active one?

As with all passive solutions, the two ETFs offer a fully transparent and rules-based approach, which eliminates any manager risk. It’s also worth noting that the liquidity of the ETFs will make them a highly effective tool in portfolio management.

Finally, what does STOXX contribute in the process of creating the underlying of your products?

We and our institutional investors perceive STOXX as the leading index brand for European equities. A combination of its set-up and experience, alongside the personal efforts and engagement of its indexing team, convinced us to develop these indices jointly. STOXX supported us fully with their indexing capabilities and provided a frictionless link to Sustainalytics as ESG screening provider.

 

Featured indices

EURO iSTOXX® ESG-X & Ex Nuclear Power Multi Factor Index

EURO STOXX® ESG-X & Ex Nuclear Power Minimum Variance Unconstrained Index

 

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