Investors have ploughed more than $1.6 billion into socially responsible ETFs over the last year, prompting industry commentators to predict that SRI and ESG (environmental, social and governance) ETFs will become the mainstream.
Data from TrackInsight shows that global ETF investors allocated $1.69 billion over the last 12 months and around $1.14 billion year to date to these funds.
There are more than 40 so-called principles-based ETFs in the US, investing in various asset classes, ETF.com found.
ESG: The new normal?
Nicco Ferrarini, executive director, EMEA client coverage at MSCI, said that ESG would become mainstream within 10 years.
“Everything in a decade from now will be ESG and it will become the new standard, even if it is niche now,” he said. “There’s mounting evidence that ESG can add rewards to your performance in terms of risk mitigation.”
In a risk-on market where equity markets are rising, investing in ESG and SRI is seen as less of a risk or potential sacrifice of returns.
Higher costs for socially responsible funds
One sticking point is annual fees. While non-ESG and SRI equity ETFs are as low as 0.03%, the cheapest SRI ETF is the iShares ESG 1-5 Year USD Corporate Bond ETF (SUSB) for 0.12%, and the cheapest ETF tracking US stocks is the iShares MSCI USA ESG Optimized ETF (ESGU) at 0.15%.
Higher costs do not necessarily deter investors from a good product. A study by the US SIF Forum for Sustainable and Responsible Investment found that US investment in ESG strategies grew to $8.7 trillion in 2016, up 33% since 2014.
Yet socially responsible ETF assets remain a small share of the $4 trillion market.
Keeping in line with the broader market
The largest socially responsible ETF in the US is the iShares MSCI KLD 400 Social ETF (DSI) with $930 million under management. It costs 0.50% in fees and tracks the broad US equity market, and is up 16.2% year to date, not far from the SPDR S&P 500 ETF Trust (SPY)’s return of 16.4% over the same period.
While iShares dominates the top three most asset-heavy funds, State Street can claim number four on the list with the SPDR SSGA Gender Diversity Index ETF (SHE) which launched in 2016, tracking companies that promote women in senior roles, and it was one of the most successful new fund raisers that year. It has risen 14.9% year to date in USD terms.