With the increasing scope for advisers to access ETFs which operate on sound ESG principles, Christopher Mellor, Head of EMEA ETF Equity Product Management at Invesco, looks at some of the ways in which this can be achieved and the advantages of doing so.
It’s safe to say that 2019 was a landmark year for ESG as the investment theme entered the mainstream. In fact, exchange traded funds (ETFs) that include ESG considerations were among the fastest growing segment in Europe last year, with the broad category enjoying a 130% increase from net new assets alone. While new ESG investors may be gaining their first exposure, some investors are looking to integrate ESG throughout their portfolio, but the objectives, risk tolerance and performance expectations may vary widely from one investor to the next. As demand for ESG broadens, it’s important you have clarity on what each product in the market aims to do so you can make informed decisions for your clients.
In the early days of ESG (or ethical investing, SRI, green or any of the other labels that have been used), funds would often be chosen based more on what was being excluded or how the fund manager would select stocks and less on performance. Yes, the investor would look at the track record, but performance tended to be of secondary importance. While some funds may have outperformed the market over the long term, exclusions generally resulted in performance deviating from the broader benchmark over shorter time periods, sometimes for the better and other times the worse.
If it was a small holding in a well-diversified portfolio or the investor didn’t need a certain return, then that performance profile might have been perfectly acceptable. If, on the other hand, the fund was going to be a significant part of the portfolio, then a greater level of reliability might have been required, even if returns cannot be guaranteed.
The same reasons that passive ETFs in general have seen such phenomenal growth over the past decade also applies to ESG investors, although passive ESG ETFs have been a relatively new development. ETFs offer many potential benefits that could be attractive whether you are interested in ESG or not.
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