Industry Updates

European investors demand more ESG and core index ETFs

Tom Eckett

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Environmental, social and governance (ESG) and core index products are the top two areas European buyers want ETF providers to develop further, according to the latest Brown Brothers Harriman (BBH) survey.

The annual survey, which interviewed 100 institutional investors, financial advisers and fund managers from across Europe, also found demand for smart beta ETFs significantly dropped this year having been the second highest on buyers lists in 2019 behind active ETFs.

This year, active ETFs were also in less demand as “limited regulatory action” from the Central Bank of Ireland continues to be a stumbling block for non-transparent ETFs.

Title: In which of the following areas would you like more ETFs to be available in your local market?

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Source: Brown Brothers Harriman

ESG is one of the key trends for European investors in 2020. According to data from ETFGI, ESG ETFs account for just $52bn of the $6trn industry, however, 73% of European investors said they plan to increase their allocations to ESG investments this year.

Furthermore, in five years’ time, 45% of European respondents said ESG ETFs will make-up over 11% of their portfolios.

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Source: Brown Brothers Harriman

The report said the increasing regulatory demands combined with the “cultural view” of ESG investing in Europe are key factors in driving growth.

Last year, the EU Commission introduced new disclosure requirements earlier this year related to sustainable investments. The regulation was implemented around three pillars; the elimination of greenwashing, regulatory neutrality and a level playing field for all investors.

Ryan Sullivan, senior vice president of global exchange traded fund services at BBH, commented: “It should come as no surprise that ESG investing has captured the attention of the financial industry. European investors are sending a clear message: ESG is immensely important to their portfolio construction.

“The stated enthusiasm for ESG strategies, however, is somewhat at odds with what we see in the market. ESG ETFs have captured just a fraction of total global ETF AUM…but as the adage goes: past performance is no guarantee of future results.”

In terms of European investors’ biggest concerns around the ETF wrapper, 26% highlighted worries about spreads being too wide and uncertain while 19% blamed platform issues. Some 23% said they did not have any concerns about ETFs.

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Source: Brown Brothers Harriman

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