While wider markets suffered their worst quarter for flows and performance since the Global Financial Crisis (GFC) in 2008, investors continued to pile into ESG ETFs, another sign sustainable investing is here to stay.
According to data from Morningstar, ETFs listed in Europe suffered their worst monthly outflows on record in March with €22bn pulled from products, €13.7bn more than the previous record set in August 2019.
Despite this however, ETFs with an ESG tilt saw €730m inflows in the same month taking its total net flows to €7bn for Q1.
The positive flows during a period of market turmoil highlight the “stickiness” of ESG investments, according to Hortense Bioy, director, passive strategies and sustainability research at Morningstar.
Although ESG ETFs make up just €31bn of the €781bn European ETF ecosystem, the recent flows reveal an industry ripe for rapid growth.
A recent Brown Brothers Harriman survey found 54% of global investors surveyed plan to increase their allocations to ESG ETFs in 2020 alone.
Bioy added: “The fact that even at the height of the market rout investors continued to pour money into ESG and that AUM held up compared with the previous quarter rather than go down is bound to support the narrative being built around ESG as a structurally sounder investment bet.
“This also speaks of the stickiness of ESG investments,” she continued. “Investors in sustainable funds are typically driven by their values, invest for the long term, and seem to be more willing to ride out periods of bad performance.”
Along with the strong inflows, ESG ETFs have also outperformed the wider market. Highlighting this, the MSCI World ESG Leaders index returned -19.6% in Q1 versus -20.9% for the MSCI World.
Furthermore, 80% of global ESG ETFs listed in Europe outperformed the MSCI World, according to data from Morningstar.
It was a similar story for US and European exposures with 76.9% outperforming the S&P 500 and MSCI Europe index, respectively.
However, Nicolas Rabener, managing director at FactorResearch, stressed the importance of viewing this outperformance through sector and factor lenses.
ESG ETFs typically have a higher weighting to the tech sector while underweighting the energy sector which was hammered following the collapse in oil prices.
When studying the MSCI World ESG Leaders index, for example, it has a 19.9% weighting to IT and a 2.8% weighting to energy while the MSCI World has a 19.1% and 3.4% weighting to IT and energy, respectively.
Rabener commented: “Although ESG ETFs have outperformed year-to-date, very little of this can be attributed to the behaviour of companies, unless you are penalising an energy company for operating in the energy sector.”
From a factor perspective, companies in ESG ETFs tend to score highly from a quality and low volatility perspective while avoiding more value-orientated businesses.
Low volatility companies have outperformed over the past month with the MSCI World Minimum Vol index returning -9.8% versus -13.2% for the MSCI World and -16.7% for the MSCI World Value index.
However, Patrick Thomas, head of ESG investments at Canaccord Genuity Wealth Management, suggested companies with stronger ESG scores had delivered strong performance during the downturn.
“The interesting thing is there also seems to be an individual stock attribution effect for companies with more robust policies and procedures around ESG too,” he said.
“Normally this is the kind of utopian comment you should be wary of but looking at ETFs with higher Morningstar Globe Ratings on sustainability was also correlated to outperformance in Q1.
“The bit we can say with a degree of confidence is ESG ETFs have had two tests; the correction in Q4 2018 and the coronavirus crash. They look like they have passed both.”
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