Stockholm (NordSIP) – Over the last six years, ESG investing has gone mainstream. Following the signing of the Paris agreement, the flow of capital into sustainable strategies has been unstoppable. According to the United Nations Conference on Trade & Development (UNCTAD) 2021 report on the global market for ESG exchange-traded funds (ETFs) notes that in 2020 the number of ESG ETFs jumped 59% to reach a record level of 552 funds. ESG ETF asset under management (AUM) reached over Us$174 billion, thanks to net ESG ETF inflow funds of almost US$79 billion.
However, the continuous growth has started to raise more and more alarm bells about greenwashing, which has led to increasing regulatory action and oversight.
While North America remains the main market for ETFs overall, Europe dominates the market for ESG ETFs in terms of number of funds and AUM. Developing economies now have a significant share of the ETF market but are almost entirely absent from the ESG ETF segment.
In 2020, the number of ESG ETFs targeting the SDGs grew to 38%, to reach US$72 billion in assets allocated to sectors or themes of relevance to the SDGs.Nevertheless, despite their growth, ESG ETFs continue to represent a relatively minor share of the ETF universe (8%) and an even smaller share of AUM (2%).
The average sustainability performance of ESG ETFs, as a group, is higher than for non-ESG ETFs, and their sustainability ratings are positively correlated with the increasing sophistication of ESG strategy.
Average 1-year net returns for ESG ETFs were 15%, with positive average net excess returns, versus 9% for non-ESG ETFs, that had negative average net excess returns. According to the report, this suggests that investors did not pay a systematic ‘performance penalty’ for investing in ESG ETFs.more sustainable investment strategy.
However, as the market expands, and products proliferate, the risk of “greenwashing” looms larger over investor considerations. Going forward, efforts will be necessary to mitigate the risk of greenwashing and to ensure that ETFs and the wider fund industry contribute to sustainable outcomes, including the UN’s SDGs.
To increase transparency, UNCTAD recommends increased self-reporting, external auditing, stock exchange guidelines and increased disclosure demands in their listing requirements.