While environmental, social and governance (ESG) factors have been influencing investing for many years now and investors have been incorporating more and more ESG strategies into their portfolios, the proportion of this market taken up by exchange traded funds remains tiny.
According to a McKinsey & Co study last year, some $22.9 trillion (€19.7 trillion), or 26% of total professionally managed assets in Asia, Australia, New Zealand, Canada, Europe and the US was invested in ESG strategies at the start of 2016. European investors were ahead of the curve, according to the study, with 52.6% of total assets invested according to sustainable principles.
Yet TrackInsight data shows that only just under €5 billion sits in socially responsible ETFs today, with 41 funds offering such exposure (though the definition of ESG and SRI strategies plays a role here, with firms offering these types of funds under many different labels).
Investors expect flows to rise
However, a recent survey by State Street ETFs shows that the majority of professional investors believe that flows into these products will rise in the next five years.
According to the research released last week, some 83% of institutional investors and wealth managers questioned said inflows into ESG ETFs will rise by 2023, with 22.5% expecting this rise to be “dramatic”.
Nearly two thirds (63%) of the respondents said the key factor behind this increase will be rising demand from investors, with a quarter suggesting the main driver of this demand will be regulatory change.
TrackInsight data shows that flows into socially responsible stocks ETFs have been steadily rising throughout this year, with nearly €1 billion in total inflows this year to date (29 June 2018) and very few instances of notable outflows (see chart below). However, the returns from these strategies over the period remain lacklustre (though still positive) at 1.8%.
New offerings to satisfy demand
But not all ESG funds are built the same, as there is a wide variety of stocks and industries these funds can exclude. According to State Street’s survey, some of the areas that investors most wish to avoid are weapons manufacturers, fossil fuel companies and organisations that conduct animal testing.
The latest product provider to venture into the ESG ETF space is Vanguard, which already has a mutual fund investing according to these principles, and plans to offer two ESG ETFs from September – a US-based one and an international version. These will respond to investor demand by excluding such industries as tobacco, alcohol, weapons, fossil fuels and nuclear power, the company said.
Vanguard is following in the footsteps of some of its rivals – for example, BlackRock announced plans earlier this year to launch two ETFs that exclude investments in producers and big retailers of civilian firearms, following a high school shooting in February in the US.
BlackRock’s iShares already offers a range of such funds, including the iShares MSCI Europe SRI UCITS ETF, iShares MSCI EM ESG Optimized ETF and iShares MSCI USA ESG Select ETF. Meanwhile, State Street itself has the likes of SPDR S&P 500 Fossil Fuel Reserves Free ETF and the SPDR SSGA Gender Diversity Index ETF on offer. According to State Street’s survey, the latter is one of the key considerations for investors – some 26% of respondents said an ESG ETF with a focus on diversity would attract their attention.
Overall, socially responsible investing is a difficult area for gathering statistics, since the funds cover such a broad range of offerings, but growing demand means we are likely to see more launches in the future from some of the key providers in the industry and detailed surveys can show which areas are attracting investors’ money.