20 Sep 2019
20 Sep 2019
Welcome to the second instalment in our three-part series on ESG investing.
Last week we looked at three of the main drivers that support ESG in portfolios: the effect of recent financial crises, greater climate change awareness among investors, and increased regulatory pressure on asset managers.
This week we add a quantitative element to our analysis, looking in more detail at demand for ESG products.
How much demand is there for ESG funds, both active and passive – and what do ﬂows tell us about ESG preferences among investors today?
Read on for three key takeaways.
A significant proportion of global assets is already managed in an ESG-compliant way. A total of $31trn is invested in sustainable investment assets worldwide, according to the Global Sustainable Investment Alliance, which has factored in both active and passive ESG funds, as well as ESG integration within traditional investments.
The $31trn figure, calculated at the end of 2018, is a 34 per cent rise since 2016, taking ESG’s share of global assets up to 39% – meaning nearly four in every ten euros invested worldwide is classified as ESG1.
It’s worth noting that the bulk of this figure comes from ESG integration within traditional investments. When we look exclusively at funds whose main investment objective is ESG related (the global ESG mutual fund industry), by the end of June 2019, this had reached $2trn in size.
Historically, many investors have preferred active funds for their ESG exposure. Yet index-based ESG funds, while they still take a minority share of ESG flows, are growing at a much faster rate than their active counterparts.
Active ESG funds have grown worldwide at 11 percent per year over the last five years. Passive ESG fund assets on the other hand have grown at a rate of 33 percent per year over the same period – 3x faster than active2.
The data also suggest that ETFs in particular are gaining popularity among ESG-conscious investors in Europe. ESG ETF flows in Europe hit a new record high in H1 2019, as shown in the green line below.
While 2018 was not the best year for ESG inflows (€28bn, compared to the €50bn yearly average from 2014 to 2017), 2019 has already surpassed this figure in its first half. By the end of June 2019, active and passive ESG funds had already collected €29bn.
In Europe, ESG assets reached €1.1trn end of June 2019, a 12 percent per year growth rate over 5 years, compared with an 8 percent growth rate for the overall funds industry2.
Lyxor expects active and passive flows into ESG funds in Europe to continue, supported by investors’ changing preferences towards ESG integration and changes in regulation.
One key piece of regulation is the European Commission’s action plan to finance sustainable growth, announced in March 2018. This will compel all investors to include ESG criteria in their investment decisions, which has the potential to support ESG investments into the future.
Recent ESG flows seem to support our view on the positive future of sustainable investing. We see ETFs and ESG as a natural fit and expects this segment of Europe’s ETF market to continue growing.
We look at the question on everyone’s mind: Does ESG investing degrade a portfolio’s performance?
1 Global assets under management totalled $79.2trn in 2017, according to Boston Consulting Group.
2Morningstar data to H1 2019.
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