Competition Heats Up For ESG ETFs

A new analysis in Morningstar’s report entitled Passive Sustainable Funds: The Global Landscape shows the number of tracker funds with a dedicated “sustainable” focus hit 534 by the end of the second quarter of 2020.

In the US, BlackRock, Calvert, DWS Group and Vanguard collectively run all of the cash invested in the ten largest sustainable passive funds. Vanguard’s FTSE Social Index Fund Class now stands at $7.9bn, just ahead of BlackRock’s iShares ESG MSCI USA ETF with $7bn in assets under management.

BlackRock and Vanguard have been courting investors interested in environmental and socially responsible strategies with increasing aggression in recent years.

In January, BlackRock CEO Larry Fink used his annual address to put on record that climate change, in particular, was leading markets to “a fundamental reshaping of finance.”

“The evidence on climate risk is compelling investors to reassess core assumptions about modern finance,” he said. “Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk.”

In June, Vanguard published its own update to investors, explaining how it was addressing climate risk and outlining why investors should embrace stewardship ensure companies change behaviours.

“Few companies—and few if any long-term investors—will be exempt from the far-reaching implications of climate risk,” it said.

“The benefit from sound oversight of ESG risks can accrue over years and decades. Our views on climate change are predicated not on an ideological stance, but rather on a fiduciary one.”

In Morningstar’s latest update, it noted that global sustainable fund flows have continued to be strong throughout the Covid-19 pandemic, with assets in dedicated ESG or sustainable funds now topping $1trn, globally.

“In addition to launching new sustainable funds, asset managers have continued to convert and rename existing conventional funds to sustainable investment offerings,” says Hortense Bioy, a director in Morningstar’s sustainability research team.

In a separate research paper in June, Morningstar observed that the industry still needs to make adjustments to its existing approaches, to accommodate the increasingly ambitious demands of investors and intermediaries.

“There are many established ESG measures to help investors pursue different approaches to investing sustainably, but there is room for further improvements as the quality and comparability of the data—from issuers and asset managers—continues to create challenges for investors,” the company’s analysts said.