Low carbon investment strategies are expected to be the main driver of growth in ESG ETFs in Europe, according to research from Cerulli Associates.
Fabrizio Zumbo, Associate Director, European Asset Management Research, Cerulli.
In the latest issue of The Cerulli Edge—European Monthly Product Trends, Cerulli notes that 86% of ETF issuers in Europe believe ETFs that eliminate exposure to fossil fuels or minimize a portfolio’s carbon intensity are set to be the most popular environmental, social, and governance strategies in the future.
In contrast, the study found that ETFs based on exclusions and negative screening are likely to be less popular with only 54% and 46% of issuers, respectively, expecting demand for these strategies to increase over the next two years.
The study’s findings are significant as investors have increasingly sought to align their portfolios with ESG criteria recently, a trend that is expected to continue in the future.
According to data from Broadridge, as of the end of August 2020, assets invested in European ESG ETFs amounted to €49.7 billion ($58.3bn), representing a 69.1% increase from the end of 2019.
Fabrizio Zumbo, Associate Director, European Asset Management Research at Cerulli, commented, “In 2019, ESG ETFs domiciled in Europe collected a total of €16.1bn of net new money from investors. With net flows of €19.1bn in the first eight months of 2020, last year’s total has already been exceeded.
“In March, at the height of the Covid-19 pandemic, the European ETF market experienced €25bn of net outflows, yet investors continued to put assets into ESG ETFs which saw €700 million of net inflows during the month.”
According to Zumbo, the acceleration in demand for ESG ETFs reflects the introduction of new innovative products, a growing awareness that ESG considerations can potentially have a positive impact on investment returns, as well as clear ESG guidance from the EU’s taxonomy on sustainable finance and other related legislation.
Equity funds account for the majority (€40.4bn) of the total ESG ETF universe in Europe with the remainder (€9.3bn) in fixed income ETFs. Sustainable bond ETFs have increased their market share in recent years, however, highlighting a potential opportunity in this space.
Zumbo added, “Although these products still represent a small proportion of the European ETFs ecosystem, going forward they are expected to receive more interest from investors, and asset managers are having to keep up with clients’ evolving demands.”