No Doubt as to Sustainability of Eco-Friendly Exchange-Traded Funds
October 26, 2020 — London
European investors are prioritizing climate-linked products
Targeting portfolio holdings that focus on minimizing carbon usage or being free from fossil fuels is set to be the most popular approach to incorporate environmental, social, and governance (ESG) factors into exchange-traded funds (ETFs), according to the latest issue of The Cerulli Edge―European Monthly Product Trends. Some 86% of the ETF issuers in Europe that responded to a survey by Cerulli Associates believe this will be the case.
By the end of August 2020, European ESG ETF assets reached €49.7 billion (US$58.3 billion), a 69.1% increase from the end of 2019, Broadridge data shows. Equity ESG ETFs accounted for €40.4 billion of the total and fixed-income ESG ETFs for €9.3 billion.
Cerulli research indicates that exclusions and negative screening are likely to be less popular with ETF issuers: only 54% and 46% of survey respondents respectively expect demand for these approaches to increase in the coming 12 to 24 months.
“In 2019, ESG ETFs domiciled in Europe collected a total of €16.1 billion of net new money from investors. With net flows of €19.1 billion in the first eight months of 2020, last year’s total has already been exceeded,” notes Fabrizio Zumbo, associate director, European asset management research at Cerulli. “In March, at the height of the COVID-19 pandemic, the European ETF market experienced €25 billion of net outflows, yet investors continued to put assets into ESG ETFs, which saw €700 million of net inflows during the month. Although these products still represent a small proportion of the European ETFs ecosystem, going forward they are expected to receive more interest from investors and asset managers are having to keep up with clients’ evolving demands.”
During the first half of 2020, several ETF issuers launched innovative propositions in the ESG space. The European market has taken the lead on embedding ESG matters in investment practice. The EU’s taxonomy on sustainable finance and other legislation will further strengthen the ESG push. “Managers and investors are also starting to recognize the positive effect ESG considerations can have on investment returns,” says Zumbo.
- August was another positive month for passively managed assets in Europe. However, the net inflows of €13.7 billion were down 39% on the previous month. ETFs attracted €8.9 billion in net sales in August, half of which can be attributed to bond ETFs (€4.5 billion). Equity ETFs, the month's second best-selling asset class, attracted €3.7 billion.
- Global equity shares were broadly higher in August amid hopes of a COVID-19 vaccine, signs of continued economic recovery, and ongoing policy-support measures. The sector posted net inflows of €4.9 billion in August, the fifth consecutive month of positive sales after the March sell-off.
- The U.K. mutual fund industry had a positive August, gathering £322 million (US$416 million) to make a modest recovery following the previous month's £1.4 billion of net outflows. August's best-selling asset classes were money markets and bonds. The worst-selling asset classes were mixed-asset and property funds.