The EMEA sustainable ETF market has soared over the past two years as assets enter the market in tandem with the launch of new and innovative products.
This year, sustainable ETF assets in Europe have doubled to $67bn, as at the end of October, highlighting the strong growth that has taken place in the space.
This year, in particular, has been a monumental year for sustainable ETFs following significant outperformance of their parent products which has offered some downside protection during the volatile periods experienced at the end of Q1.
While some market participants point to 2020 as the breakout year for ESG, James Gloak, iShares sustainable investing specialist at BlackRock, believes this momentum began back in 2018.
Discussing the drivers behind sustainable strategies and the appropriate methods available to investors, here is what Gloak had to say.
What have been the main reasons behind the increase in investor demand and do you expect it to continue?
While the inflows have been significantly large in 2020, this is not unique to this year. Last year was record-breaking for EMEA Sustainable ETFs and this surge actually began towards the end of 2018.
To put it into perspective, the EMEA sustainable ETF industry gathered $5bn in assets for 2018 which then jumped to $18.5bn for 2019. To the end of October this year, EMEA has raised $32bn in sustainable ETF assets, already overtaking last year’s flows total even with coronavirus ‘handbrake’.
While it looks like we will not be more than tripling assets again this year, this will likely be seen as an extension of last year’s breakthrough.
What has happened in 2020 is that ESG has been brought to the attention of an even wider audience. This was down to multiple publications covering the outperformance of ESG indices versus their parent, as well as the resilience of ESG ETF flows, during the mid-February to mid-March market downturn.¹ Investors that are starting to look at sustainable strategies, will no doubt have seen this increased ‘noise’ and positive market data, and this could well have brought forward their move into sustainable by six to nine months.
At BlackRock, this has been reinforced by the increase seen in requests for information on our sustainable strategies, and, as more ESG data on companies comes to light, either voluntarily or through regulatory direction, we see sustainable strategies becoming more appealing and supporting the move towards ‘sustainable being the new standard’.
Why should investors consider an indexing approach when it comes to investing sustainably?
Sustainable investing used to cater to niche investors and was often considered expensive, values-focused and indifferent to performance. Indexation is helping to upend these perceptions by delivering choice, value and access to all investors. The growing recognition that sustainability can influence risk and return has contributed to the recent growth of sustainable indexing, both in ETFs and mutual funds.
There is currently a change underway where more and increasingly standardized ESG data will help support the growth of sustainable indexing. More and better-standardised ESG data can have two key positive impacts: driving better ESG indexes and improving measurability for companies to change their sustainable behaviours.
Through indexing investors can access ESG at a fraction of the cost compared to active funds. Until recently, sustainable investment strategies were available only through higher-fee actively managed funds or highly customised mandates that required in-house ESG specialisation. Sustainable indices are helping drive down the total costs of investing sustainably, while broadening the variety of available exposures. An example of iShares removing the price barrier to sustainability is that our ESG Screened and ESG Enhanced ETF exposures are priced the same as their standard ETF counterparts2.
And finally, sustainable indexing has brought significantly greater choice to the market, both across equities and bonds, thereby making it possible to create an entire portfolio out of sustainable funds.
At the same time, the methodologies that guide sustainable ETFs and index funds are inherently transparent, which helps investors build portfolios with consistent sustainable outcomes. They also make it possible for investors to clearly articulate their objectives to stakeholders.
What solutions do iShares offer in this space?
At BlackRock, we’ve looked to provide a range of product offerings across the ‘sustainable spectrum’ to meet the investment needs of clients wherever they are on their sustainable journey. We therefore have three main ESG strategies: a simple exclusionary only offering, an ESG optimised strategy and an ESG ‘top performers’ strategy.
The ESG top performers strategy, our SRI range, is our flagship sustainable offering having launched in 2016 and currently makes up $16bn out of a total of $25bn in iShares EMEA sustainable ETF assets.
Our exclusionary strategy (ESG Screened) and ESG optimised strategy (ESG Enhanced) were both born out of a client consultation we held back in 2018. The majority of clients voiced their need for a simple exclusionary only strategy (ESG Screened launched October 2018) which removed business activities such as tobacco production, controversial weapons and thermal coal. However, there was also demand for these screens with an ESG improvement plus tracking error target and this became our ESG Enhanced range in March 2019. These ranges are now $4.6bn and $1.7bn in AUM respectively.
In each of these ranges we have launched multiple exposures (World, EM, Europe, EMU, USA, Japan) in order to provide the underlying building blocks that a client might need to transition from a standard portfolio to a sustainable one.
Combined with the choice of offerings we provide across the sustainable spectrum, we believe we have an ESG strategy that a client can feel comfortable and confident in transitioning to wherever they are on their sustainable journey.
They can either stay close to the standard index in terms of risk and performance while implementing exclusions or exclusion with ESG improvement, or progress further along the spectrum and only select those companies with the highest ESG performance. This can also be used as a ‘stepping stone’ approach allowing clients the flexibility to move along the spectrum as their investment and sustainable needs dictate.
While the AUMs of our ESG Screened and ESG Enhanced strategies might still be relatively small compared to that of our longer established SRI strategy, we see significant potential for growth as these two strategies are very much being seen and used as the ‘ESG alternatives’ to standard offerings and so are well positioned to support investors taking their first steps in sustainable.
1. BlackRock with Q1 2020 data from Bloomberg and Morningstar as of 7 May 2020. Over 90% of sustainable indices outperformed their parent benchmark during this period of the heightened market uncertainty and drawdown. Past performance is not a reliable indicator of future performance.
2. BlackRock as of November 10, 2020
Capital at Risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. BlackRock has not considered the suitability of any investment against your individual needs and risk tolerance. All figures are from BlackRock as of November 10, 2020.
James Gloak is iShares sustainable investing specialist at BlackRock
This article first appeared in the Q4 2020 edition of Beyond Beta, the world’s only smart beta publication. To receive a full copy, click here.