ESG ETFs Gain in Favor as Investors Look to Responsible Corporations

As more people look to investments for companies that act like better global citizens, exchange traded funds that track environmental, social and governance principles have attracted greater attention.

As of July 30, ESG-themed ETFs attracted a record-setting $38 billion in new inflows for the year and crossed over $100 billion in total assets for the first time, Financial Times reports.

Matteo Andreetto, head of State Street Global Advisors’ SPDR ETF business, projects ESG ETFs and index mutual funds could even hit $1.3 trillion by 2030. ESG funds were gaining momentum even before this year, and Andreetto argued that the pandemic only put a spotlight on the need to improve issues such as income inequality, diversity and climate change.

“The people who were really getting the worst [effects of the pandemic]were the lowest paid people,” Andreetto told FT.

State Street Global Advisors’ SPDR S&P 500 Fossil Fuel Free ETF (SPYX) also attracted $157 million in net inflows year-to-date, according to XTF data. SPYX tries to allow climate change-conscious investors to align the core of their investment strategy with their values by eliminating companies that own fossil fuel reserves from the S&P 500. The energy market, which is viewed as a proxy for economic growth, has been among the worst-hit assets in response to the growing threat of the spreading coronavirus on the global economy.

Meanwhile, in Europe, where ETFs are primarily used by institutional investors, the UN Principles of Responsible Investing has played a major role in the adoption of ESG investments. The PRI, which calls on investors to commit to “incorporate ESG issues into [their]investment analysis and decision-making processes”, includes over 3,000 investors and fund managers. “Many asset owners and investment firms are clearly placing greater emphasis on ESG issues than before,” Andreetto added.

With growing evidence that ESG does not diminish performance in favor of global good, a growing number of investors are looking at ETFs that track sustainable indices for their core exposure since they aren’t losing anything by switching out traditional benchmark investments.

However, there is still a need for a more unified code of ESG classifications.

“Even top companies may have very different ratings, depending on who the index provider or rating agent is,” Andrew Craswell, head of European ETF relationship management at Brown Brothers Harriman, told the FT. “So I think providers are looking at how they create more of a uniform approach.”

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