The shift towards sustainability investing is one of the most revolutionary investment developments of our time. A transformation that will shape the future for successive generations, the rise of environmental, social and governance (ESG) is gaining momentum alongside the growth in assets allocated to exchange-traded funds (ETFs).
We are witnessing a surge in ESG investment from index management to active and beyond. With €42bn inflows into the European ESG ETF market in 2020 versus €17bn in 2019, the fast pace of AUM growth continues, achieving an increase in excess of 135% in 2020 to almost €82bn in ESG ETF assets1.
To explore this increasing demand for ESG ETFs and understand what is driving ESG allocation decisions, Amundi commissioned a survey of 171 professional investors from across Europe.
ESG ETF allocations rising
ETFs are an ideal, low-cost way for investors to diversify their portfolios. Allocating assets to ESG-focused ETFs gives investors exposure to stocks that contribute towards positive impact, or exclusion of those that have negative impacts. ESG ETFs in Europe accounted for 51% of total ETF flows in 20202. Furthermore, our ETF investor survey confirmed that 69.7% are planning to increase their allocations towards ESG ETFs in 2021.
Aligning investments with personal or corporate values stood out in the survey as the primary reason for investors allocating assets to ESG (77.3%). Despite the growing impact of regulation in ESG investing, respondents confirmed that they were more motivated to allocate assets to ESG exposures by the role of ESG in driving performance (50%) and in risk management (48.5%), rather than regulation (24.2%).
Changing times: ESG performance and asset allocation
Whether or not investors have to sacrifice performance to invest sustainably has become a fiercely debated topic, yet our survey shows 84.9% of investors believe that ESG investing does not equate to throwing away basis points. The past decade of data is in the favour of these investors with the MSCI World SRI Index returning 10.8% each year versus 10.1% for the MSCI World.3 As investors transition to more sustainable solutions, there are many possibilities to align performance with sustainability profile. From addressing their individual values, to managing sustainability risks, seeking to generate impact or using ESG as a factor to drive sustainable performance, there is no one-size-fits-all approach to incorporating ESG into portfolios.
Once a niche thematic holding, ESG is moving towards core allocation within portfolios of the future; 67% of survey respondents view ESG as core, rather than satellite holdings. This shift to the mainstream is highlighted by the launch of ESG versions of traditional indices, such as the S&P 500 ESG and the EURO STOXX 50® ESG.
Engagement drives sustainable change
ESG ETFs can be criticised for having little to no stewardship with limited ability to influence change within the companies to which they are exposed. However, passively managed assets have the same voting rights as active, and many passive managers are among the world’s largest active managers. Investors can seek a manager with the in-house expertise and resources to vote on shareholder resolutions.
Supporting the importance of passive managers’ stewardship role, 45.7% of survey respondents confirmed they would not invest in an ESG ETF from an issuer that did not consider ESG in its voting policy. Additionally 79.8% agreed that asset manager voting and engagement was either essential or very relevant.
Matching investment exposure to individual values
ESG intensity ranked as the most important aspect of ESG ETF selection criteria. This underlines the demand for ESG strategies with a genuine positive impact rather than simply treating sustainable goals as a tick box exercise.
The usual ETF selection criteria seems less critical for investors when selecting an ESG-focused product. ESG intensity ranked higher than both the index provider, and the asset manager’s ESG expertise, confirming the importance of developing solutions to match investors’ differing needs, values and constraints.
We also addressed climate-focused ETF investing in the survey and found that 74.2% of respondents had considered climate within their portfolios. Additionally 64.9% said they want to align with the goals of the Paris Agreement.
As a leader in the transition towards ESG, Amundi became one of the first issuers offering exposure to The European Union Paris-Aligned Benchmark (PAB) and Climate Transition Benchmark (CTB) indices in 2020.
ETFs have a key role to play in democratising ESG investing, redirecting capital for good, and empowering all investors to have an impact in a way that suits their needs and goals. To learn more about Amundi’s comprehensive range of sustainable ETFs, visit https://www.amundietf.fr/professional/Investing-in-ETF/Responsible-Investing
1 Source: Amundi as of end December 2020
2 Source: Amundi as of December 2020
3 Source: MSCI as at 29 January 2021
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