Professional investors are seeking a greater level of environmental, social, and governance (ESG)-focused product development in fixed income ETFs, according to research commissioned by specialist fixed income ETF provider Tabula Investment Management.

European professional investors have a significant appetite for further innovation in fixed income ESG ETFs, according to Tabula Investment Management.
In a survey of 120 professional European investors, ranging from wealth managers to pension funds, nearly all (96%) are already using ESG ETFs for either equity or fixed income exposures or both.
Adoption of ESG ETFs is the highest in the UK, Italy, and Switzerland where all investors surveyed were incorporating these funds into their portfolios.
Despite this remarkable level of penetration in just a few years, the vast majority of respondents also demanded further product development for ESG-focused fixed income ETFs including broader coverage of exposures and more transparency around the fund’s impact.
The desire for socially responsible ETFs that better cover the different fixed income asset classes was highest in Germany and Switzerland where a compelling 100% and 90% of respondents, respectively, indicated this was a priority. UK-based investors, however, were most concerned with corporate credit exposures with 85% of respondents demanding a better breed of ESG ETFs to cover the segment.
Michael John Lytle, CEO of Tabula, commented, “Responsible investing is evolving rapidly. This research gives us valuable insights into the broad trends and, crucially, the different views and priorities across countries and investor types. Creating innovative ESG ETFs that meet investor needs is a challenge for providers and one that Tabula is actively embracing.”
The research also sheds light on specific features that professional investors look for in ESG ETFs. The top answer, cited by over 70% of respondents, is the exclusion of the most harmful companies. Negative screening appears most important for UK- and Italy-based investors where 95% of respondents indicated it as a top priority.
Lytle said, “The idea of avoiding harm is clearly at the forefront of investors’ minds and the exclusion of certain companies – for example, those violating the UN Global Compact or manufacturing controversial weapons – is becoming a minimum requirement. This is a great starting point but not the whole story.”
The survey also revealed an interesting preference for outperformance potential over benchmark tracking with three-quarters (75%) of respondents labeling the former as important compared to just one-quarter (25%) who prefer to minimize tracking error. The potential for outperformance was most valued by German investors, cited by 95% of respondents.
According to Lytle, this may indicate that investors are now seeing ESG as a driver of long-term performance and not just a qualitative overlay. It also ties in with strong demand for more targeted products, indicated by 63% of respondents, that are focused on issues like climate change and diversity.
The preference for outperformance may surprise some issuers of ESG ETFs that have introduced products designed specifically to minimize tracking error relative to non-ESG market-cap-weighted benchmarks. This has typically been achieved by limiting deviations in the ESG index’s country, sector, duration, factor, or security exposures relative to its parent index. The research may prompt a change in tack for issuers of such products.