The majority of European investors are set to further increase their allocations to ETFs with an environmental, social and governance (ESG) tilt over the next 12 months, according to a survey conducted by ETF Stream and Amundi ETF.
The survey, which interviewed professional investors from across Europe, showed that over 90% of respondents are incorporating ESG in their portfolios and that 70% of respondents plan to invest in more ESG ETFs in the next year while 30% said they would retain the same allocation. Not one investor of those surveyed plans to decrease their allocation to ESG ETFs.
ESG ETFs have exploded in over the past 18 months with inflows into European ESG ETFs totalling €19.7bn this year, up from €6.3bn inflows seen at the same point in 2019, according to the Amundi European ETF market flows report.
In response, ETF issuers have launched a string of strategies to capture the growth in appetite. This year has seen a record 46 ESG ETF launches, as at the end of June, 11 more than the previous high in 2018.
Commenting on the results, Fannie Wurtz, head of Amundi ETF, Indexing and Smart Beta, said: “The most important development in the ETF industry since the beginning of the year is definitely the adoption of ESG solutions by investors. The crisis has really accelerated the rotation towards ESG investment.
“Indeed, if we consider the European equity ETF market alone, ESG represents 100% of the net inflows since the beginning of the year.”
Despite the spike in ESG product launches, investors are hungry for more. Fixed income ESG ETFs was a common theme for investors with a number of respondents highlighting core fixed income building blocks as their primary interest. Beyond this, there was demand for a range of thematic exposures as well as ETFs that combine ESG with factors.
Elsewhere, one UK respondent suggested a synthetic ETF on a US equity ESG index due to the performance pick-up investors can realise while one Italian investor called for a suite of sector ETFs with an ESG tilt.
Some respondents were keen for new ETFs to address the energy transition, an area of significant activity this year. Climate change has captured the headlines recently after the European Union’s Technical Expert Group (TEG) introduced two climate benchmarks at the end of last year.
In response, ETF issuers such as Amundi have launched a number of ETFs offering exposure to companies tackling climate change.
Some 74% of investors surveyed said they have considered climate change in their ESG ETF allocations while 26% said they had not.
Drivers of adoption
When asked about why respondents invest in sustainable ETFs, the softer aspects of aligning with values and doing good were the strongest drivers with 77% and 58% of respondents highlighting these reasons, respectively.
Performance and risk management were important for around half of respondents while just 24% highlighted regulation as a reason for investing in ESG ETFs despite rising regulatory demands especially in Europe.
While just 50% of respondents said performance was a reason for their ESG ETF exposure, a huge 85% of respondents said investors do not have to sacrifice performance when investing in ESG.
When undertaking ETF due diligence, the most important factor was at the index level (with an average score of 2.14/3) which was marginally ahead of the product level (2.14/3). The ETF issuer level was highlighted as the least important (1.65/3) by respondents. This focus demonstrates that perhaps ETF investors are not yet fully considering the impact that engagement and voting plays in aligning their ESG investments to their goals.
Overall, 73% of the 66 respondents invest in ESG ETFs while 52% use active ESG funds and 27% use index funds with an ESG tilt. Just five respondents did not invest in ESG.
“These results are fascinating and indicative of the huge growth we have seen in the sector recently. We will continue to bring innovative ETFs to the market to meet the evolving needs of investors.” Wurtz added.