Ashley Fagan, global head of ETF, indexing and smart beta strategic clients and UK/Ireland strategy distribution at Amundi, has said fixed income ESG ETFs is a key area of focus for the French asset manager in response to increasing investor demand for the asset class.

Speaking on the sixth of ETF Stream’s webinar series, ETF Ecosystem Unwrapped, entitled ESG Investing: A luxury in turbulent markets or a decade-long necessity?, Fagan (pictured) predicted this is an area of the market that is likely to accelerate from here.

This rapid development is already starting to take shape. According to data from Morningstar, assets in fixed income ESG ETFs in Europe have risen 543% over the past three years to €8.3bn, as at 31 May.

The asset class remains hugely underdeveloped in Europe with industry commentators predicting the space is “ripe for expansion”.

While Amundi already has some ETFs in this area, Fagan, who was named in ETF Stream’s Industry 30 2020, said the firm would continue to innovate across asset classes through the year in order to meet investor demand.

“We are seeing a lot of interest in this space as investors do not need to significantly change their risk metrics when implementing ESG in corporate bonds for example,” she added.

“This is a very interesting area that will only continue to accelerate.”

Why incorporating ESG in fixed income can deliver a superior risk-return profile

Overall, ESG ETFs scored a major victory during the coronavirus turmoil. During the most volatile month in March, data from Morningstar showed ESG ETFs in Europe saw €509m inflows while wider ETFs saw a record €22bn outflows, €13.7bn more than the previous record set in August 2019.

Fagan said the “remarkable” inflows could be explained by a number of reasons, one being the perception that ESG ETFs have defensive characteristics due to the composition of the benchmarks having higher exposure to sectors like healthcare that have performed well during the crisis.

Furthermore, the investment horizon for ESG investors can be longer than those that use non-ESG ETFs for tactical purposes, especially during stressed conditions.

“Investors are showing greater loyalty to their ESG investments which makes them less sensitive to market declines.

“An assumption that is consistent with that behaviour is investors derive positive utility from investing responsible which can potentially compensate for negative performance.”

On the issue of greenwashing, Fagan stressed the importance of looking beneath the hood of an ESG ETF in order to understand the investment process and what holdings the product has.

She said regulation could have an impact but argued it is very difficult for the European Union to implement a one size fits all regulation due to the cultural differences on how different ESG criteria are interpreted.

In order to address this, one approach, Fagan highlighted, was for changes to be implemented at a local regulator level.

“Do not take it for granted that an ESG ETF is sustainable just because it has ESG in the name.”

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