The environmental, social, and governance (ESG) market continues to experience growth, and increasing inflows as ever more investors pour into the space. Over the course of this year, more than $120 billion was invested in ESG funds, but it’s a space that is primarily hampered by just a few institutional investors who control the vast majority of the market, reported Advisor Perspectives.
The largest institutional investor shareholder within each of the top 25 ESG ETFs on average own roughly 25% of the fund. Compared to the S&P 500, where no singular shareholder controls more than 10% of the top three companies, it’s an enormous amount and ultimately comes at the cost of liquidity.
The iShares ESG MSCI USA Leaders ETF (SUSL) was controlled by Ilmarinen Mutual Pension Insurance Co., Finland’s largest investor, at 61% at the end of September. This particular ETF tracks the MSCI USA ESG Leaders Index and was an attractive investment for Ilmarinen.
When funding opened in 2019 for the ETF, “we made the investment decision” because of the access to the index, said Juha Venalainen, senior portfolio manager of ETF investments at Ilmarinen. “It has made management of our portfolio much easier.”
“Anchor tenants” help largely fund an ETF as it’s getting off the ground and is a common practice by many ESG ETFs before funding opens up publicly. Large managers utilize this approach when launching new ESG ETFs, such as BlackRock with SUSL.
For the ESG market to really grow, it needs a broader diversification of investors, more of a grassroots kind of investor drive. The Vanguard ESG US Stock ETF (ESGV) took this approach; currently, Vanguard Group, the fund manager, is the largest shareholder at 5.1%.
Funds with a great diversification of investors make for greater fund liquidity and are reflected directly in SUSL and ESGV. Over the course of the last three months, the average daily trading volume of SUSL was less than 85,000 shares compared to ESGV’s nearly 250,000 shares.
“For investors, having more liquidity is always a good thing,” said Eric Balchunas, senior ETF analyst for Bloomberg.
For more news, information, and strategy, visit the ESG Channel.