- ETFs that include ESG considerations see strong growth in terms of net new assets
- COVID-19 crisis has accelerated the trend towards responsible investing and sustainable investment
- Majority of investors believe ESG can enhance performance in the long run in normal market conditions
Dubai, United Arab Emirates, 27 September 2020
More than half of institutional investors (55%) believe the majority of their ESG (environmental, social and corporate governance) investments will be held in passive products such as exchange traded funds (ETFs) by 2025, according to new research study from Invesco.
Institutional investors with ESG exposure in their portfolios said that, on average, one 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. In these unprecedented times, businesses have had to adapt in an extraordinary fashion. Employee welfare, access to healthcare, corporate culture and supply-chain sustainability are all core social (‘S’) ESG issues that rose to the forefront during the pandemic. Corporate response will become more vital during tumultuous times as investors look at actions and behaviours as indicators of corporate culture.
Alessio Cirillo, Sales Director at Invesco EMEA, said: “In the Middle East, we have seen certain investor segments in the region further rethink their strategy post-COVID, as clients push to adopt ESG principles into investment processes. While climate change has been a growing concern among regional investors over the last two years, the global COVID health pandemic has really brought forward the social focus of ESG investing.”
According to a separate analysis of EMEA market flow data by Invesco, ETFs incorporating ESG criteria have been growing rapidly over the last five years, from USD4 billion in assets under management (AuM) as at June 2015 to approximately USD48 billion – around 5% of total AuM in Europe – as at the end of June 2020.
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 in the EMEA region, with the rest of the equity ETF market seeing net outflows on an aggregated basis, according to Bloomberg data. 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 (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.”
The S&P 500 ESG Index has returned 8.5% this year as of 4 September, versus 6.1% for the S&P 500. In the UAE, the newly created S&P/Hawkamah ESG Index has had a 9.3% return for the 3-month period ending 6 September, versus 4.9% for the DFM General Index during the same period.
Alessio Cirillo added: “Investors are looking more and more towards investments that align with their sustainability preferences and values. ETF providers have responded by offering an expanding range of ESG ETFs, giving investors an excellent, cost-effective and liquid means to gain ESG exposure. 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.”
Invesco, as one of the largest providers of exchange-traded funds, manages several ESG ETF products including a suite of MSCI ESG ETFs, a global equity multi-factor ESG ETF and the first Sterling corporate bond ETF in Europe that incorporates ESG criteria.
Invesco is committed to adopting and implementing responsible investment principles and is an active member of a variety of trade organizations around the globe including the One Planet Asset Management Initiative, the Forum for Sustainable and Responsible Investment, the Institutional Investors Group on Climate Change, and the World Economic Forum Coalition for Climate Resilient Investment among others. Invesco is also a signatory of the Principles for Responsible Investment.
 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.