The Journey Towards Paris-Aligned Smart Beta

    Stockholm (NordSIP) – At the end of July, Franklin Templeton added two climate-focused funds tracking the Paris-aligned versions of the Stoxx Europe 600 and the S&P 500 indices to its Franklin LibertyShare smart-beta ETF range. The Paris-aligned benchmarks allow investors to gain increased exposure to companies involved in the transition to a low carbon economy.

    NordSIP had the opportunity to catch up with Caroline Baron (Pictured), Head of ETF Sales for  Europe, the Middle East and Africa at Franklin Templeton, to hear more about the story behind these funds, their target audience and appeal.

    The LibertyQ Smart Beta ETF Range

    Franklin Templeton’s ETF journey began four years ago, according to Baron. “In 2016, we set out on a multi-year strategy to launch two specific lines of business: our smart beta LibertyQ ETF line and our actively managed Liberty ETF line. In November 2017, we launched our suite of 16 passive ETFs in the US that includes both country and regional exposures, leveraging the deep expertise of our dedicated ETF team.”

    Following their launch in the USA, Baron explains it was time to cross the pond. “In Europe, we rolled out our first smart beta ETFs there in late 2017 and our smart beta suite offers seven ETFs covering emerging markets, US, European, Asian and global equity strategies, two of which have a dividend focus. The Franklin LibertyQ UCITS Smart Beta ETF range consists of five multi-factor equity funds, which have a specific focus on quality and value factors, but also encompass low volatility and momentum. And there are also two income-focused funds, which invest in stocks demonstrating high and persistent dividend income (Franklin LibertyQ Global Dividend UCITS ETF and Franklin LibertyQ European Dividend UCITS ETF).”

    Following the launch of a Euro green bond ETF and a suite of passive emerging markets ETF in 2019, the asset manager turned its attention to climate change. “In July 2020 launched two Paris Aligned climate ETFs, which brings our strong line up to 16 smart beta, active and passive ETF strategies for European investors.”

    Paris Alignment

    The new Paris-aligned funds are a response to demand for investments that integrate environmental, social and governance (ESG) components. “As we see an increasing demand from investors around the ‘E’, ‘S’ and ‘G’, we’ve spent some time in designing new strategies in that space, meeting the needs of investors but also complying with new sets of regulation.”

    “At the end of July 2020, we launched two Paris-Aligned climate ETFs (Franklin STOXX Europe 600 Paris Aligned Climate UCITS ETF and Franklin S&P 500 Paris Aligned Climate UCITS ETF) being an early provider in the European market to launch cutting-edge ETFs at a very competitive cost and compliant with the new EU Climate Paris Aligned Benchmark rules,” Baron says.

    “These are smart beta ETFs providing exposure to European and US large and mid-capitalisation stocks respectively with the aim of reducing climate change risk and accessing opportunities in the low carbon transition in a broad diversified equity strategy,” she adds.

    “Our new ETFs are on a very specific decarbonisation trajectory aligning with the Paris Agreement, which is unique. Additionally, the fact that every single stock in the major benchmarks of S&P 500 and STOXX Europe 600 indices is assessed for their climate policies and alignment to 1.5C scenario, these ETFs can be used as a core sustainable allocation rather than a niche exposure.”

    Appealing Price

    Elaborating on her claim that the two funds were the “cheapest climate ETFs in the European market”, Baron explained that the two Paris-aligned ETFs “have total expense ratios (TERs) of 15 basis points and are the cheapest climate ETFs in the European market.”

    “At Franklin Templeton, we believe beta should be offered inexpensively,” she added. “We recognise that management fee is the primary driver of the total cost of ETF ownership, and thus, our Paris Aligned Climate ETF pricing is focused on bringing this component down.”

    Rising Popularity

    Discussing the target audience for the Paris-aligned funds, Baron was keen to note that the investor base is progressively expanding. “The initial focus of our new climate ETFs is on institutional investors, particularly insurance companies.”

    “However, as the industry moves towards greater transparency and disclosure, underpinned by the new disclosure regulation scheduled for March 2021, we anticipate a more widespread uptake among discretionary wealth and family offices and asset managers. We believe that these funds will be core portfolio holdings, used as either a replacement for traditional non-compliant indices or a complement to existing compliant holdings.”

    Spreading Northwards

    “We’ve seen strong interest from investors in the UK, Italy and Germany in these new products and expect a similar level of interest from Nordic investors,” Baron says. Regulation is a strong driver behind the interest in ESG products. “For example, European regulators increasingly seek demonstrable evidence of ESG integration so investor demand for sustainable investments is set to continue its strong growth trajectory. Flows into sustainable ETFs more than doubled in 2019 and we believe, this momentum is likely to continue, supported by the new benchmarks and robust disclosure regulations.”

    “The forward-looking approach that our strategies take has been well-received by many investors looking to have a proactive approach when it comes to decarbonisation and investing their money in tomorrow’s companies. The level of ESG adoption varies country by country but the direction of travel is the same,” she concludes.

    Image courtesy of Franklin Templeton

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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