ESG ETFs dominated ETF industry growth in 2020, particularly in Europe. TrackInsight’s Simon Mott says: “The ESG ETF industry has been around for a while, but something big happened last year. At the start of 2014 there were about 45 ESG ETFs with around USD5 billion AUM. By the start of 2019, the assets had only grown to around USD27 billion AUM across 273 ETFs. But by December 2020, assets had exploded to USD190 billion across 545 funds.”
Cerulli Associates also commented on the growth with Fabrizio Zumbo, associate director, saying ESG ETF assets grew at a CAGR of 72 per cent between 2015 and 2019.
The greatest growth in ESG ETFs has been in Europe, but the arrival of new US President Joe Biden is bringing hope to ESG ETF providers looking for performance in their sector worldwide.
Chris Huemmer, senior investment strategist with FlexShares, says: “I think the Biden administration will definitely bring ESG ETFs into far greater focus, and even just three days into Biden’s presidency you have seen actions that support this.”
“Biden’s administration puts the climate change and social equity issues at the forefront of his policies,” says ESG ETF specialist Linda Zhang (pictured) of Purview Investments. “His latest USD1.7 trillion climate proposal aims at restraining emission by fossil fuel firms, boosting renewable energies, electric transportation and job creation. These policy initiatives are likely to accelerate industry transitions to low-carbon economy, providing enduring investment cases for climate solution themed ETFs and ESG ETFs in general.”
One of the very first actions of the new President was to bring the US back into the Paris climate agreement.
Matthieu Guignard, Global head of product development and capital markets at Amundi ETF, comments: “Following the election of Joe Biden as President, climate related topics came back to the fore in the US.
“The Biden administration brings new hope for the global fight against climate change and for climate advocacy. Its agenda made the climate one of its priorities with ambitious climate actions, notably, firstly, on the first day of his mandate, Joe Biden signed orders to have the US rejoin the 2015 Paris climate agreement and secondly, substantial investment in clean energy infrastructures – transportation, electricity, building sectors, etc. We believe this should be supportive for ETF flows toward ESG products both in the US and around the world.”
Dorrit Lowsen, President and COO of Change Finance, agrees, saying: “Under the Biden administration, I believe we will continue to see the ESG ETF sector grow vigorously. The new administration has already, in less than 24 hours, taken significant steps to unwind harmful environmental and social policies of the previous administration.
“That is just the beginning and I believe we will see much more action to implement policies that support ESG investing. I expect that this administration will reverse the recent Department of Labor rule that makes utilising ESG criteria in selecting funds for retirement plans more difficult and the rule changes that make it more difficult to file shareholder resolutions.
“We have already seen the support for ESG-driven shareholder resolutions increase and as long as it remains relatively easy to file such resolutions, I think that trend will continue. We could also see policy changes that require increased transparency on ESG issues from corporations which would lead to more and better data investors can use to evaluate material ESG factors. I believe that the new administration will recognize what many investors and asset managers already have, that ESG is not just about feeling or doing good, but that ESG factors are, in fact, material to good investing.”
François Millet, Head of ETF Strategy, ESG and Innovation at Lyxor Asset Management, comments that ESG ETFs have been stronger in Europe. “ESG ETFs have taken the lion share of inflows in Europe with 51 per cent of net new assets in 2020. More than 50 per cent of ESG ETFs worldwide are listed in Europe, though Europe makes up 16 per cent global ETF assets. It is no surprise that Europe is leading the way, as the previous US presidency has probably slowed the rise in ESG ETFs in the US and the new one will probably trigger some form of rebalancing.
“Essentially, the USA produces 15 per cent of the world’s greenhouse gas emissions, so seeing them joining back the Paris-agreement is great news. Their withdrawal had curiously never unsettled the agreement neither triggered chain reaction from others, but today the return of the USA in the agreement makes it stronger than ever. It will just bolster the ESG transformation in process in the ETF market.
“In 2020, the Covid crisis has enhanced interest in ESG and climate-aligned ETF strategies which more than offset the negative influence of the US official position on climate. Seeing the US setting soon new emission reduction targets to 2030 and a commitment to net zero emission by 2050, joining the many countries which have taken such commitment in the meantime, will amplify this interest.
Amundi’s Guignard agrees: “We believe that US Index providers will accelerate the dissemination of indices incorporating ESG factors, thus offering investors, including those in Europe, new investment opportunities.
“Against this backdrop, the rotation toward ESG products will continue to accelerate in Europe. Indeed, 2020 set a new record with remarkable and constant in-flows, firstly collecting EUR44.4 billion, greater than 50 per cent of total Equity & FI in-flows, and secondly multiplying in-flows by 2.5 vs 2019. The beginning of the year confirms the trend, validates investors’ appetite for such products and stamps the European leadership in the ESG space.”
Guignard believes that one of the main reasons for this is the fact that the European fund industry plays a key role in driving companies to transition by promoting ESG and Climate friendly solutions to investors in line with the European regulatory framework objectives.
“Meeting ESG and Climate regulation compliance, reporting guidelines and transparency are key drivers to reinforce the influence and popularity of ESG products toward investors,” he says.
Elisabeth Kashner, Director of ETF Analytics, FactSet makes a slightly different point. “I may be a bit of a contrarian but I do see ESG investing, to a certain extent, as a consumer response to regulatory failure and I wonder if as regulation tightens ESG investing will lessen as time goes on,” she says.
ESG uptake has been stronger with the institutional audience, who are led by their trustees’ concerns on what funds are invested in. FlexShares’ Huemmer says: “When I look at our institutional client base, I am already seeing ESG adoption there, as they are increasing the use of sustainability metrics with traditional financial analysis.”
He also finds that a lot of advisers are looking at ESG investing capabilities to differentiate themselves from other advisers.
“One of the things I have been talking to advisers about is that if you are not talking to your clients about ESG investing, there is someone else out there who is. Advisers should have it as part of their toolkit and make sure they are able to converse on ESG topics, as it will be part of the due diligence process going forward,” Huemmer says.
Looking forward, FactSet’s Kashner comments that as ESG funds accumulate a longer track record, their central proposition of being able to return the same, with less risk, will be tested.
“2020 was an exception to this because of the divergence of the energy and technology sectors. Until then, historically the performance of ESG funds was neither better nor worse,” she comments, noting that there is still just no common language for talking about ESG.
“It’s a bit of the Wild West but there are dozens of different ESG systems, some bigger and some smaller and they all are using slightly different input data and interpretations and all suffer with collection issues” Kashner warns.
“There are no mandatory standardised disclosures so what passes through one organisation’s screen is not passed on to another and it could be lost in the crowd. Because of that it is not at all uncommon to look at a fund produced by system A through the lens of system B and find it lacking.
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