Stockholm (NordSIP) – Although much ink has been spilt over the need to direct capital towards sustainable investments, the devil is in the detail. One of the hurdles of this journey is the manner in which such investments are to be conducted. According to a new report by Invesco, institutional investors appear to be settling for exchange-traded funds (ETFs) as their preferred channel of ESG investing.
The report surveyed 101 European institutional investors and found that 21% of ESG assets are invested passively, via ETFs. However, 45% of all respondents reported they intend to increase their exposure to ESG ETFs in the next two years, while only 5% plan to decrease it.
The shift can perhaps be understood through the perspective of another of the report’s revelations. 60% of respondents also believe that ESG ETFs are likely to outperform traditional non-ESG benchmarks, even in normal market conditions. Another 36% reportedly did not see any connection between ESG and performance while another 4% said the relationship pointed in the opposite direction, believing ESG factors hurt performance. More specifically, 51% of respondents expect these ESG flows to be directed at equity ETFs over the next 12 months. Only 24% believed fixed income would receive the bulk of the capital inflow. Another factor that appears to have contributed to the appeal of ESG ETFs is the pandemic. According to the survey, 68% of institutional investors believe that COVID-19 will accelerate ESG investments.
“For the growing number of investors looking for funds with ESG considerations, it is clear that ETFs are playing an increasingly central role in helping them gain exposure,” Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, says. “Investors are often first attracted to ETFs due to their low costs and simplicity, but as we have seen so far this year, ESG ETFs have also been able to deliver on performance objectives.”
Market flow data collected by Invesco covering Europe, the Middle East and Africa (EMEA) shows that ESG ETFs have gone from US$4 billion in assets under management (AUM) in June 2015 to US$48 billion at the end of the first half of 2020. ESG ETFs now represent 5% of all AUM in Europe. These figures are consistent with recent ETF flow data from Calastone, which highlight the extreme popularity of the ESG segment.
In an indication of the market focus on ESG, across the first half of 2020, USD11.5 billion of net new flows were into equity ESG products, with the rest of the equity ETF market seeing net outflows on an aggregated basis. By comparison, only around 7 per cent of the USD19 billion of net flows into fixed income ETFs over the first half of the year were into funds with ESG considerations.
“The range of ESG ETFs continues to expand, giving investors an excellent, cost-effective and liquid means to gain ESG exposure that meets their individual needs and preferences. For example, they can exclude companies in undesirable industries or with poor ESG scores or they could tilt the profile to reward companies that are industry leaders on key ESG issues,” Buxton concludes.