More than half of institutional investors expect most of their ESG investment will be held within passive products within the next five years.
This is a significant increase on current portfolios, according to this research by Invesco.
Currently institutional investors with ESG exposure within their portfolio have around a fifth (21 per cent) of these assets in passive vehicles, such as ETFs.
Just under half (45 per cent) said they planned to increased the amount they invest in ESG ETFs over the next two years, with only 5 per cent planning to decrease passive exposure.
The research founds that 55 per cent expect the majority of their exposure to be via these passive vehicles within a five year time frame.
Investors also found that more than two-thirds (68 per cent) of institutional investors believe that the Covid-19 pandemic will accelerate the development and take up of ESG investments further over the next two years. Just 4 per cent said that they disagreed.
According to separate analysis of EMEA market flow data by Invesco, ETFs incorporating ESG criteria have grown rapidly over the last five years, from $4 billion in assets under management as at June 2015, to around $48bn at the end of June 2020. This is around 5 per cent of the total AUM in Europe.
In an indication of the market focus on ESG, across the first half of 2020, $11.5 billion of net new flows were into equity ESG products, with the rest of the equity ETF market seeing net outflows on an aggregated basis.
By comparison, only around 7 per cent of the $19 billion of net flows into fixed income ETFs over the first half of the year were into funds with ESG considerations. The latter is a relatively new but growing segment of the ETF market, with currently only 36 funds available in Europe, less than a third of equity ESG ETFs.
Invesco head of EMEA ETFs and indexed strategies Gary Buxton says: “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.
“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.”
Invesco’s survey revealed that 60 per cent of institutional investors believe that ETFs with ESG considerations have the potential for enhanced performance compared to non-ESG equivalents, even in normal market conditions. Only 4 per cent said that ESG ETFs would not be able to outperform, while 36 per cent believe there is no connection between ESG and relative performance.
Buxton adds: “The range of ESG ETFs continues to expand, giving investors cost-effective and liquid means to gain ESG exposure that meets their individual needs and preferences.
“For example, 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.”
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