Northern Trust’s FlexShares unit this summer introduced two new ETFs—the FlexShares STOXX US ESG Impact Index Fund (ESG) and FlexShares STOXX Global ESG Impact Index Fund (ESGG)—as core portfolio holdings. As their ticker symbols suggest, ESG and ESGG select equities based upon environmental, social and governance (ESG) factors, with the former being a domestic ETF and the latter being a global version.

Both funds are based on indexes designed and owned by STOXX, and FlexShares tries to track them closely, not precisely. Shundrawn Thomas, head of Northern Trust’s funds and managed accounts group, says the two ETFs can be used as proxies, if not identical substitutes, for major indexes like the S&P 500 or the MSCI World.

The two new products underscore an approach FlexShares has relied on for five years to align product development specifically with clients’ long-term needs. Both ETFs include companies selected from the STOXX Global 1800 Index and are designed to be core holdings structured to capitalize on increased global interest in sustainable investing.

The needs-oriented product development approach came about from conversations with the company’s affluent client base that often revolved around growing and preserving assets, managing liquidity, controlling risk and delivering income.

In the rapidly evolving ETF world marked by a constant flow of new products and not infrequent fund closures, FlexShares hasn’t closed any of its 24 ETFs.

“We don’t want to be the hot dot,” Thomas says. “That leads us to focus on products that are long-lived and more strategic.”

Both ETFs use certain key performance indicators (KPIs) to determine which companies are making progress in different ESG areas. The KPIs, which can be modified over time, are used to calculate an aggregate ESG score. The bottom 50% of companies are excluded from the index.

The portfolios are then tilted in favor of companies with higher aggregate scores with an eye to achieving the best risk-adjusted returns. To avoid overconcentration, sector and security constraints are employed to limit overexposure to those criteria. ESGG also uses country constraints. Information technology and financials are the largest sectors in both funds, representing 24.1% and 14.7% of ESG and 17.7% and 14.9% of ESGG, respectively.

Companies in the funds must adhere to the U.N. Global Compact principles. With the exception of coal companies and makers of controversial weapons, entire industries are not jettisoned. “We don’t exclude sectors on a wholesale basis,” Thomas explains. “If you have an energy company making good progress in environmental or governance areas, we view that positively from a directional viewpoint.”

FlexShares’ approach centers on a belief that businesses “aren’t all good or all bad.” “We want to look at a company’s intent,” Thomas says. “We try to come up with a process, not purchase an index off the shelf.”