What the Top ESG ETFs by inflows over Q1 2023 in Europe Signal About the Market Right Now

Rounding out the first quarter, Europe’s top ESG ETFs (as defined by Q1 2023 inflows)  demonstrate continuing market confidence in big tech and climate interest.

This article briefly explores how money is moving in and out of ESG ETFs at the moment, revealing insights into investor preferences in ESG as well as the drivers that will support the market to build momentum in a critical decade to achieve the 2030 Sustainable Development Goals (SDGs) and the Paris Agreement target.

A focus on managing ESG risks

The Top ESG ETFs in Q1 2023 (listed in Europe) by inflows were:

1. EEDM - iShares MSCI Emerging Markets ESG Enhanced UCITS ETF +$587Mn
2. SADM - Amundi MSCI Emerging ESG Leaders – UCITS ETD DR +$539Mn
3. SRICD - BNP Paribas Easy € Corp Bond SRI PAB UCITS ETF +$486Mn
4. JPCE - JPMorgan ICAV – Carbon Transition Global Equity (CTB) UCITS ETF +$433Mn
5. C6E - Amundi STOXX® Europe 600 ESG UCITS ETF +$406Mn 

Most of the ETFs mentioned above favour the exclusion-based approach, relying on screening out controversial sectors and business activities and selecting companies with the best ESG score. Investors allocating assets into this type of strategy are still taking a largely passive approach to ESG integration driven by a risk-oriented framework, with the intent to manage ESG risks rather than create ESG impacts through financial flows.

In terms of holdings of the top ESG ETFs by inflows, Tech companies consistently appear at the top by share of assets, followed by financial services and consumer goods. Given its relatively clean operations, the tech sector is often a proxy for building a high-performing ESG portfolio but for investors looking to drive impact, this may not be enough for sustainability-centred objectives.

Climate investing is on the agenda

The top ESG ETFs display a keen interest in the climate agenda, reflecting the general trend. iShares MSCI Emerging Markets ESG Enhanced UCITS ETF adheres to the standards of the EU Climate Transition Benchmark (CTB), which incorporates specific objectives to reduce greenhouse gas emissions. Meanwhile, BNP Paribas Easy € Corp Bond SRI PAB UCITS ETF, based on the Bloomberg MSCI Euro Corp SRI Sustainable Select Ex Fossil Fuel PAB Index, looks at decarbonization trajectories to meet the EU Paris-Aligned Benchmark (PAB) guidelines. The two benchmarks represent a difference in climate integration approaches, with the PAB taking a more active role in limiting our climate future to a 1.5°C warming scenario. The EU CTB, by contrast, is intended to protect against climate risks but does not require activities exclusion. This explains its greater inclusion of conventional oil and gas holdings.

The other fund on the list with climate objectives is JPMorgan ICAV – Carbon Transition Global Equity (CTB) UCITS ETF, benchmarked against the JPMorgan Asset Management Carbon Transition Global Equity Index. This fund allows exposure to global equities that are best positioned to benefit from the climate transition. The fund is also classified as SFDR Article 9, with an explicit sustainable investment objective while taking a thematic approach through a focus on climate.

Driving momentum through active and impact-driven investments to achieve 2030 goals

1. A greater push towards more intentional, impact-driven results is necessary rather than simply managing ESG risks. This must be supported by the right regulatory framework such as the European Sustainable Finance Disclosure Regulation (SFDR), which makes a distinction between funds with ESG considerations and ‘dark green’ funds that explicitly carry a sustainable investment objective.
2. Active divestment from fossil fuels to achieve climate objectives. After the release of the IPCC’s Sixth Assessment Report, which concluded in no uncertain terms the necessity of immediate fossil fuel divestiture if we want to curb warming to 2°C, investors should proactively develop phase-out strategies not only for thermal coal but all fossil fuels and impose carbon sequestration requirements on any exceptions. It should be noted that oil and gas companies perform remarkably well in ESG ratings, and can therefore end up in benchmark indices, not for lack of ESG criteria or fund assessment methodology but for their performance in Social and Governance aspects that span the ESG spectrum.
3. Thematic ETFs are an opportunity to achieve greater impact through investment flows. The heightened focus on select themes provides for deeper analysis, meaningful and substantive impact, and accountability for sustainability-related fund objectives. Thematic ETFs allow investors to move beyond the broad scope of ESG to zero in on an issue of interest, which leads to more specialized and diverse portfolios than what we are seeing here, in turn expanding financing opportunities for innovative but smaller cap companies. Thematic ETFs can better facilitate specific ESG objectives.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.