ETFs to Dominate ESG Exposure for Institutional Investors

As it stands, on average passive funds account for a fifth (21%) of ESG assets for institutional investors although the Covid-19 pandemic is set to accelerate this adoption.

Just under half (45%) of these investors plan to increase the amount of ESG assets they hold in ETFs over the next two years. Meanwhile, 68% of respondents believe the Covid-19 pandemic will accelerate the adoption of both ETFs and ESG investments over this timeframe.

This comes as investors’ interest in ESG investments has already spiked during the pandemic. Recently, Morningstar revealed that ESG funds attracted global net inflows of $71.1bn between April and June, pushing assets under management in this sector to new highs of just over $1trn.

Many fund houses around the world have experienced surges in demand for their ESG products during the pandemic. In June 2020, a JP Morgan special report into the virus’s impact on ESG investing called this a “major turning point”, finding parallels were being increasingly drawn between the unforeseen risks of a pandemic and issues such as climate change.

At the same time, demand for passive investments has held up and inflows to these products have been strong. Jason Xavier, head of EMEA ETF Capital Markets at Franklin Templeton, wrote in a recent blog: “In the past few months, we’ve seen the ETF ecosystem demonstrate resilience and robustness in continuing to provide clients with the ability to adjust their portfolios intraday and in real-time.”

This view supports Invesco’s research, which found only 4% of institutional investors said Covid-19 would not accelerate their use of ETFs for ESG investments.

Interestingly, while equity ETFs are expected to take the lion’s share of ESG investment over the next 12 months (51%), 24% of institutional investors said they believed fixed income ETFs would be the main beneficiary of such flows.

“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,” said Invesco head of EMEA ETFs and indexed strategies Gary Buxton.

“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.”