Assets in ESG ETFs remain sticky in challenging market environment

ESG ETFs saw €6.2bn inflows in Q2

Tom Eckett

ESG globe world

Demand for ESG ETFs has been strong despite this year’s environment favouring areas of the market such as energy stocks making it no wonder issuers have been launching strategies at a rapid rate over the past few years.

According to data from Morningstar, ESG ETFs in Europe saw €6.7bn inflows in Q2 despite assets decreasing from €232bn to €216bn. This accounted for 42% of total flows into European-listed ETFs as investors continued to shift assets to strategies with an ESG tilt despite many underperforming in the first six months of the year.

The war in Ukraine, soaring inflation across western economies and underperforming tech companies has created a favourable environment for non-ESG ETFs which typically hold more energy stocks, the best performing sector this year.

This is not the first time investors have maintained their assets in ESG ETFs despite a challenging market environment. During the March 2020 sell-off, ESG ETFs in Europesaw €730minflows while overall ETFs saw a record €22bn outflows in the same month.

Looking at the reasons for this, investors in ESG ETFs are typically driven by values, hold for the long term and appear more willing to ride out periods of poor performance, according to Hortense Bioy, global director of sustainability research at Morningstar.

While ESG ETFs saw inflows in Q2, there has been a notable uptick in flows in recent weeks. According to data from Ultumus, inflows into eight of the top 10 ETFs in Europe in the week to 3 August had an ESG tilt.

Of particular note was the Xtrackers MSCI USA ESG UCITS ETF (XZMU) which saw inflows of $1bn while investors piled $846m into the Xtrackers ESG EUR Corporate Bond UCITS ETF (XB4F) as investors used the short-term momentum in stocks to rotate further assets into ESG strategies.

From a longer-term perspective, ESG ETFs are set for a further regulatory tailwind after a MiFID II obligation, which requires professional investors to ask about their clients’ preferences on sustainable investments, came into effect on 2 August.

As Damien Lardoux, head of impact investing at EQ Investors, said: “It will impact flows over the long term but I would not expect a sudden rise of inflows from the day it has been implemented.”

The future certainly looks bright for ESG ETFs despite the challenges they have faced this year and the recent inflows go to show that investors were simply waiting for the right market environment to deploy further assets.

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