As the universe of environmental, social, and governance (ESG) investing continues its rapid expansion, consumers are increasingly turning to ESG data and scoring.
With new standards being added and advisors pondering how to best integrate ESG funds into client portfolios, there’s ample opportunity for active managers to make inroads into this growing market segment.
“Funds, like ETFs and mutual funds, may consider a wide range of factors that are consistent with their objectives and strategies when selecting investments. This can include ESG, which stands for environmental, social, and governance,” according to the Securities and Exchange Commission (SEC).
As the global exchange traded fund market accumulated $7.6 trillion in total assets under management over 2020, actively managed and ESG principles stood supreme.
According to TrackInsight data, global investors funneled $80 billion in net inflows to active ETFs, which grew by 55%, hitting a new high of $273.5 billion in assets. With almost 200 new active ETF launches in 2020, there are now over 1,052 listed Active ETFs on global exchanges.
Meanwhile, ESG ETFs reached a tipping point in 2020, experiencing 223% growth over the year, with a new record of $189 billion in total assets under management. ESG ETFs attracted $97 Billion in net inflows over 2020 and almost 200 new ESG ETFs launched during the same period. Looking ahead, the ESG theme is set to become a new battleground for issuers over 2021.
An ESG Opportunity?
“Funds that elect to focus on companies’ ESG practices may have broad discretion in how they apply ESG factors to their investment or governance processes,” continues the SEC. “For example, some funds integrate ESG criteria alongside other factors, such as macroeconomic trends or company-specific factors like a price-to-earnings ratio, to seek to enhance performance and manage investment risks. Other funds focus on ESG practices because they believe investments with desired ESG profiles or attributes may achieve higher investment returns and/or encourage ESG-related outcomes.”
Investors should also consider how various active managers implement ESG practices.
“A portfolio manager’s ESG practices may significantly influence performance. Because securities may be included or excluded based on ESG factors rather than other investment methodologies, the fund’s performance may differ (either higher or lower) from the overall market or comparable funds that do not employ similar ESG practices,” concludes the SEC.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
