EBI’s ESG-integrated portfolios are now live. To mark the launch and in the run up to 2020, it’s an opportune moment to look back at the series of ESG blogs we have run over the last few months and to summarise the key takeaways for financial advisers.
Firstly, demand for passive solutions is soaring. As previously mentioned, an ETFGI report found that global ESG ETFs/ETPs assets increased by almost 30% in 2018 ($7.6 billion in net new assets) whereas assets in equivalent non-ESG funds grew by less than 5% in the same period.
Is ESG therefore a fad, with ETF providers jumping on the bandwagon? As we’ve discovered, there are ETFs for almost every whim nowadays – including a ‘vegan’ ETF which still has a heavy proportion invested in tech stocks.
But we think ESG is here to stay, and rightly so. The main indicator of ESG’s longevity, and of it becoming a priority for asset managers, is the new laws from the EU commission around low-carbon investments and requiring asset managers to improve their standards in terms of ESG integration and disclosure.
Secondly, we debunked a few myths in our blogs. One is that investing in ESG inevitably means sacrificing returns. A Blackrock Investment Institute’s Global Insights report found that, over six years to May 2018, the World ex-US index returned 10.5%, while its ESG counterpart improved this result by 0.6% over the same timeframe. In emerging markets, the ESG index returned 9.1%, while its parent benchmark delivered just 7.8%.
As ESG evolves, there will be less expectation that investors have to give up returns, especially if a portfolio is built from the bottom up with an ESG focus, rather than simply stripping out stocks or sectors from an index. But for the moment, the majority of ESG assets in Europe are still in funds which are built according to so-called ‘negative screening’ processes. There is plenty of room for evolution there.
Another myth is that ESG is more expensive than ‘normal’ funds. This may have been the case in the past when there was less competition and arguably less demand. But times have changed, and recent Morningstar data found that the average annual fee of an equity ETF in Europe was 0.33%, while the average fee for an ESG ETF was three basis points cheaper at 0.30%.
It is understandable that despite falling prices and decent returns, advisers may still be wary of ESG due to funds’ short track records, and, in some funds, a lack of liquidity. But the beauty of an ETF is that it is traded intraday on a stock exchange, and is therefore more liquid than most actively managed funds. Second, ESG assets are growing. The largest ESG ETF in Europe – the UBS ETF MSCI World Socially Responsible UCITS ETF – it has around £867 million.
At EBIP, we think there is still a lack of appropriate ESG funds to choose from. We hope this will change. For example, ESG bond funds are much less prevalent than equity ETFs. (There are only eight of them in Europe, from three providers, and mostly in corporate bonds.) As a result, the criteria governing an ESG bond fund is looser than for equities. An ESG bond fund will also tend to have fewer securities than a normal bond ETF in the index – for example, the UBS Bloomberg Barclays Euro Area Liquid Corporates UCITS ETF has 820 index constituents and its sustainable counterpart ETF has 624.
Despite the quirks of the ESG ETF market in Europe, we only see this trend going in one direction: upwards. It’s important to give financial advisers and their end clients choice – and an opportunity to align their cash with their values. It’s the right thing to do, and, in our view, doesn’t have many of the downsides that have been propagated among industry insiders for years. So in 2020, it might be time to consider an ESG portfolio.