ETF Investors Are Taking a Greater Interest in the ESG Theme

As more investors reassess their investment portfolios in a post-coronavirus pandemic environment, socially conscientious investments like exchange traded funds that track environmental, social, and governance factors are beginning to gain momentum.

In response to the increased interest for ESG investment options, more impact investing funds are launching to keep pace with demand, CNBC reports.

According to a recent Morningstar report, both the number of sustainability-focused index funds and their assets under management have doubled over the past three years. As of the end of the second quarter of 2020, there were 534 index funds focused on the sustainability theme with a combined $250 billion in assets. In the U.S., which has fallen behind Europe in the ESG investing category, assets in sustainable index funds have quadrupled over the past three years, now representing 20% of the total.

“There’s a great realization today that ESG issues are investment issues,” Alex Bryan, Morningstar’s director of passive strategies research for North America, told CNBC. “They’re issues that can affect the bottom line, and that may not always be something that comes to bear immediately. But it’s something that I think more people are starting to understand is aligned with shareholder value maximization.”

Actively managed ESG funds continue to attract the lion’s share of new investment money and make up a much larger slice of the sustainable investing landscape. Combined inflows into both active and passive ESG-focused funds have reached $71.1 billion over the second quarter, pushing global assets under management above the $1 trillion levels for the first time.

As a way to better help investors captures these ESG principles, State Street Global Advisors has come out with a handful of ESG or socially responsible ETF strategies. For example, more recently launched SPDR S&P 500 ESG ETF (EFIV) enhances both SPDR’s ESG and S&P 500 ETF offerings, helping investors incorporate ESG while achieving a risk and return profile comparable to the S&P 500. The ETF tracks the S&P 500 ESG Index, which is designed to measure the performance of securities meeting certain sustainability criteria (i.e., criteria related to environmental, social, and governance factors) while maintaining a similar overall industry group weight as the S&P 500 Index.

Additionally, the SPDR MSCI ACWI Low Carbon Target ETF (NYSEArca: LOWC) targets the MSCI ACWI Low Carbon Target Index, which tries to address carbon exposure by overweighting companies with low carbon emissions relative to sales and per dollar of market capitalization, compared to the broader market. LOWC was created for the U.N. Joint Staff Pension Fund.

Looking ahead, the shift in wealth from older generations to millennial investors could contribute to the increased attention on ESG-related funds. Bryan argued that the coming $30 trillion wealth transfer from baby boomers to their millennial and Gen X children is one contributing factors that will spur long-term growth in sustainable funds.

According to a recent survey conducted by Morgan Stanley’s Institute for Sustainable Investing, about 95% of millennials respondents showed interest in sustainable investing, and 75% believe of those surveyed revealed that their investment decisions could impact climate change policy.

The recent Covid-19 pandemic has also highlighted the importance of resilient business models and how companies treat all their stakeholders, including employees and customers.

“The Covid-19 pandemic and movement for racial justice in the U.S. have kept attention on social issues, including workplace safety and diversity, and have likely added to interest in sustainable funds,” according to the Morningstar’s report.