ETFs playing an increasing role in ESG exposure

Investors say passive vehicles will be useful for building ESG exposure in the coming five years.

More than half of Investors are gaining ESG exposure through passive exchange traded funds (ETFs), despite the market volatility witnessed since the outbreak of the global pandemic.

A poll of 101 major European investors including pension funds and insurance companies, commissioned by ETF provider Invesco, found that 55% of investors believe the majority of their ESG investments will be through passive vehicles in the next five years.

More than a fifth of investors identified their ESG exposure as currently being held in passive products. Meanwhile, nearly half (45%) said they plan to increase the amount they invest in dedicated ESG ETFs in the coming two years.

“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 Gary Buxton, head of EMEA ETFs and Indexed Strategies at Invesco.

“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 survey results come a month after separate research from Morningstar, reported by ESG Clarity, which showed that sustainable fund flows accounted for nearly a third of all European fund flows during the second quarter of 2020.

Morningstar researchers found that the growing investor interest in ESG issues had been partially driven by corporate behaviours during the Covid-19 pandemic.

“The disruption caused by the pandemic has highlighted the importance of building sustainable and resilient business models,” it concluded.

The latest Invesco research found that 60% of investors said that ETFs with ESG considerations have the potential for “enhanced performance” compared to non-ESG equivalents.

“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,” Buxton added.

“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 research was conducted by independent agency Pollright between 18 May and 6 July 2020.