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.
This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU. These products comply with the UCITS Directive (2009/65/EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on www.lyxoretf.com, and upon request to email@example.com.
Except for the United-Kingdom, where this communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658, this communication is issued by Lyxor International Asset Management (LIAM), a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2014/91/EU) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).
The products mentioned are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them. Updated composition of the product’s investment portfolio is available on www.lyxoretf.com. In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.
Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.
Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance.
Conflicts of interest
This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.