Study reveals rapid growth in ETFs with exposure to ESG

MUSCAT, SEPT 29 - More than half of institutional investors (55 per cent) believe the majority of their ESG (environmental, social and corporate governance) investments will be held in passive products such as exchange traded funds (ETFs) by 2025, according to new research study from Invesco. Institutional investors with ESG exposure in their portfolios said that, on average, one fifth (21 per cent) of those assets are currently held in passive vehicles such as ETFs. Just under half (45 per cent) of those investors plan to increase the amount they invest in ESG ETFs over the next two years. Only 5 per cent said they plan to decrease passive exposure.

The research also found that more than two-thirds (68 per cent) of institutional investors believe that the COVID-19 pandemic will accelerate the development and take-up of ESG investments further over the next two years. In these unprecedented times, businesses have had to adapt in an extraordinary fashion. Employee welfare, access to healthcare, corporate culture and supply-chain sustainability are all core social (‘S’) ESG issues that rose to the forefront during the pandemic. Corporate response will become more vital during tumultuous times as investors look at actions and behaviours as indicators of corporate culture.

Alessio Cirillo, Sales Director at Invesco EMEA, said: “In the Middle East, we have seen certain investor segments in the region further rethink their strategy post-COVID, as clients push to adopt ESG principles into investment processes. While climate change has been a growing concern among regional investors over the last two years, the global COVID health pandemic has really brought forward the social focus of ESG investing.”

According to a separate analysis of EMEA market flow data by Invesco, ETFs incorporating ESG criteria have been growing rapidly over the last five years, from $4 billion in assets under management (AuM) as at June 2015 to approximately $48 billion – around 5 per cent of total AuM in Europe — as at the end of June 2020.

In an indication of the market focus on ESG, across the first half of 2020, $11.5 billion of net new flows were into equity ESG products in the EMEA region, with the rest of the equity ETF market seeing net outflows on an aggregated basis, according to Bloomberg data. By comparison only around 7 per cent of the $19 billion of net flows into fixed income ETFs over the first half of the year were into funds with ESG considerations.

Invesco’s survey among institutional investors found that half (51 per cent) believe that the majority of flows into ESG ETFs over the next 12 months will go into equity ESG ETFs with a quarter (24 per cent) believing that the majority will go into fixed income ESG ETFs. The latter is a relatively new but growing segment of the ETF market, with currently only 36 funds available in Europe, less than a third of equity ESG ETFs.

Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, said: “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. 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.”

Invesco, as one of the largest providers of exchange-traded funds, manages several ESG ETF products including a suite of MSCI ESG ETFs, a global equity multi-factor ESG ETF and the first Sterling corporate bond ETF in Europe that incorporates ESG criteria.