More than half of institutional investors (55%) believe the majority of their ESG investments will be held in passive products such as exchange traded funds (ETFs) within the next five years, according to new research from Invesco1.
Institutional investors with ESG exposure in their portfolios said that, on average, a fifth (21%) of those assets are currently held in passive vehicles such as ETFs. Just under half (45%) of those investors plan to increase the amount they invest in ESG ETFs over the next two years. Only 5% said they plan to decrease passive exposure.
The research also found that more than two-thirds (68%) of institutional investors believe that the COVID-19 pandemic will accelerate the development and take up of ESG investments further over the next two years. Just 4% said that they disagreed.
According to separate analysis of EMEA market flow data by Invesco, ETFs incorporating ESG criteria have grown rapidly over the last five years, from USD4 billion in assets under management (AuM) as at June 2015 to c. USD48 billion – around 5% of total AuM in Europe – as at the end of June 20202.
In an indication of the market focus on ESG, across the first half of 2020, USD11.5 billion of net new flows were into equity ESG products, with the rest of the equity ETF market seeing net outflows on an aggregated basis. By comparison, only around 7% of the USD19 billion of net flows into fixed income ETFs over the first half of the year were into funds with ESG considerations.
Invesco’s survey among institutional investors found that half of (51%) believe that the majority of flows into ESG ETFs over the next 12 months will go into equity ESG ETFs with a quarter (24%) believing that the majority will go into fixed income ESG ETFs. The latter is a relatively new but growing segment of the ETF market, with currently only 36 funds available in Europe, less than a third of equity ESG ETFs.
Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, said: “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. 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.”
Invesco’s survey revealed that 60% of institutional investors believe that ETFs with ESG considerations have the potential for enhanced performance compared to non-ESG equivalents, even in normal market conditions. Only 4% said that ESG ETFs would not be able to outperform, while 36% believe there is no connection between ESG and relative performance.
Gary Buxton continued: “The range of ESG ETFs continues to expand, giving investors an excellent, cost-effective and liquid means to gain ESG exposure that meets their individual needs and preferences. For example, they can exclude companies in undesirable industries or with poor ESG scores or they could tilt the profile to reward companies that are industry leaders on key ESG issues.”
The firm’s ESG products include a suite of MSCI ESG Universal Screened UCITS ETFs, launched in June 2019; a global equity multi-factor ESG ETF that is actively managed by the Invesco Quantitative Strategies team and the first Sterling corporate bond ETF in Europe that incorporates ESG criteria.
In March, the firm launched its S&P 500 ESG UCITS ETF on the London Stock Exchange. The fund provides risk and return characteristics similar to that of the bellwether S&P 500 Index, but with a significantly improved ESG profile.
1 Research by Invesco commissioned with Pollright, the research arm of Citigate Dewe Rogerson, between 18th May and 6th July among 101 European institutional investors including pensions funds, mutual funds and insurance companies.
2 Analysis of EMEA ETF market flows across H1 2020 by Invesco
