Most New Europe-Listed ETFs Ahead Could Come With an ESG Tilt

European markets have been the vanguard of the socially responsible investing initiative, with the majority of exchange traded funds listing in Europe over the next year expected to incorporate environmental, social, and governance principles.

According to a PricewaterhouseCoopers global survey, 80% of some 60 ETF providers in Europe say that more than half of their planned products will invest with an ESG tilt, the Financial Times reports.

The PwC report, which projected that the ETF market will double globally to $20 trillion by 2026 from the current $10 trillion, outlined the growing pressures that European providers are under to invest with an ESG focus due to increasing social responsibility, investor demand, and regulations.

Marie Coady, global ETF leader at PwC, also added that product innovation in the ETF space was at an “all-time high,” with a majority of the innovation being driven by investor demand for ESG-related products.

“People are creating more bespoke indices and tracking areas that investors are really, really interested in, and that’s driving more innovation and moving ETFs away from the historic passive indices that we would have seen,” Coady told the Financial Times.

Participants in Europe are feeling “the strongest pressure for change,” according to the report.

Following European ETF markets, in Canada, 46% of providers indicated that over half of their products will also include a ESG focus. Meanwhile, the ESG-related ETF launches in Asia and the U.S. are relatively lower at 38% and 28%, respectively.

The PwC report also noted that in Europe, ETF providers face greater regulatory hurdles, including a “plethora of ESG designations and reporting requirements in different markets.” Specifically, compliance with article eight and article nine under the EU’s new Sustainable Finance Disclosure Regulation could be a problem for ETFs that fully replicate broad cap-weighted or thematic indexes.

The report also warned that many still face challenges in securing reliable and consistent data to ESG ratings and scorings, since there is no unified system in place.

“There are implementation challenges for index-tracking ETFs at the moment with SFDR, but the alignment of regulations for managers together with the alignment of regulations for index providers, will certainly give ETF providers the ability to obtain the data that they require in order for ETFs to meet their pre-contractual and periodic disclosure requirements under SFDR,” Coady added.

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