ETF issuers not focusing on ESG are set to lose out in a big way

Tom Eckett

a bridge over a river

Environmental, social and governance (ESG) investing is the hottest trend in finance right now as changing investor habits combined with a

favourable regulatory backdrop

provide the perfect environment for a huge upswing in ESG ETF assets.

Sustainable investing has exploded onto the investment landscape in recent times with assets totalling $31trn at the end of 2018, a 34% increase in two years.

This has translated to the ETF space in Europe especially, with ESG ETFs rising 409% to €43bn since the end of 2017, as at the end of May, making it by far the fastest growing segment of the ETF ecosystem this side of the pond.

Despite the rapid growth, however, ESG ETFs make up just 4% of the $781bn European ETF market, as at the end of Q1, highlighting just how far the segment has to travel.

Furthermore, one of the most interesting developments during the coronavirus turmoil was ESG ETFs continued to see inflows despite the historic volatility in markets.

Investors piled some €730m inflows into ESG ETFs in Europe during the March mayhem meanwhile ETFs overall saw record outflows of €22bn, €13.7bn more than the previous record set in August 2019.

Even during the heightened volatility ESG ETFs showed stickiness with Amundi’s Ashley Fagan, in ETF Stream’s recent webinar, explaining that investors showed “greater loyalty” to their ESG investments due to longer-term time horizons.

Furthermore, if, as many predict, fixed income is set to be the fastest growing segment of the ETF market then the issuer which is able to combine the ETF wrapper with fixed income ESG is set to have big success.

Fixed income ESG in the passive space represents just 5% of the overall ESG bond market compared to 30% of ESG equity funds. As we constantly hear during our Expert Investors series, investors are crying out for the fixed income ETF space to be developed further and being able to integrate ESG factors into this is an area that throws up all sorts of interesting opportunities.

Executives at every single European ETF issuer must be viewing ESG as the golden goose otherwise they risk falling behind.

Recent analysis conducted by Moody’s Investors Services found asset managers that consider ESG a top priority have an average AUM replacement rate of 117% over the past three years versus just 73% for managers that did not consider ESG a top 10 priority.

Credit Suisse AM has re-started its ETF adventure by launching only ESG-focused products and so far it has reaped the rewards by hitting $2bn AUM in the first three months. There is no question, ESG is certainly the place to be right now.

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