Morningstar finds competition ‘heating-up’ in European ESG ETF space

Tom Eckett

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Growing investor demand for environmental, social and governance (ESG) ETFs in Europe is leading to more issuers entering the space, according to Morningstar.

In its 2019 European Sustainable Funds Landscape, Morningstar reported flows into sustainable ETFs had hit a new yearly record already by the end of June, reaching €5bn for the first time.

The second biggest inflows had been last year but remained under €4bn while in 2017 ESG ETFs captured around €2bn assets.

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Product proliferation has helped drive flows with “limited choice” for European investors in the sustainable ETF space before 2017.

There are currently 102 ESG ETFs available to European investors. Some 88 are equity funds and 14 are bond funds.

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iShares and UBS have traditionally been the dominant players in the ESG ETF space in Europe and this year the two issuers have taken in €1.7bn and €1.6bn, respectively, as at the end of June.

Hortense Bioy (pictured), director of passive strategies and sustainability research, Europe, at Morningstar, noted iShares’ launch of its MSCI ESG Enhanced ETFs in March means it has overtaken UBS in terms of number of products but not yet in terms of assets.

Bioy added: “Meanwhile, competition continued to heat up in the rest of the ETF market, as evidenced by the fastest growing share of other providers.

“In response to growing investor demand, many ETF providers now offer a core set of ESG-focused ETFs, offering varying approaches to ESG integration and hard exclusions, at competitive fees.”

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In total, ESG ETFs account for 15.7% of total passive sustainable assets versus just 6.5% five years ago.

“Broad-based ESG indexes vary in terms of how strictly they adhere to ESG criteria and the degree to which they seek to mimic the risk and return characteristics of their parent index,” Bioy continued. “There is often a trade-off between ESG performance and tracking error.”

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