ESG-ETFs – More than a trend

Just a while ago, sustainable investments resembled organic food: Supply was limited, prices were high. Today, sustainable investments have long since become more than a romantic utopia. It is therefore worth taking a closer look at ESG index funds.

Sustainability in investment means that, in addition to the classic criteria such as profitability, liquidity and security, ecological, social and ethical aspects are also considered in investment decisions. These aspects consider how sustainable companies are managing in terms of ecological and social compatibility as well as good corporate governance.

For a long time, sustainable investment was considered less profitable. Today, studies are proving the opposite. In some cases, investments that take ESG criteria into account perform better in the long term. And an analysis of the management fees of ESG ETFs also shows that they need not be any more expensive than their counterparts without ESG selection criteria. This has been revealed by an evaluation using the example of ETFs on the MCSI World.

New record level for ESG ETFs

The idea of sustainable ETFs is not new. In 2006, the iShares Dow Jones Eurozone Sustainability Screened UCITS ETF was the first sustainable fund to be launched. After that, it was quiet for a few years until the topic gained importance in 2010.

Deutsche Börse offers 147 ESG indices at year-end via its Xetra trading platform and Frankfurt Floor Trading 2019. Of these, 62 were only newly listed in 2019. This means that around one-tenth of all ETFs now focus on sustainability. The number of products on offer is growing steadily and with it the range of underlying criteria.

Last year, the market for ETFs tracking sustainable investment strategies saw a significant increase: Assets invested in ESG ETFs on the Xetra trading platform rose to 23.2 bn. Euros. This corresponds to an increase of 217 %. ESG products were thus by far the fastest-growing category in Deutsche Börse's index fund segment.

The high demand for ESG ETFs is also reflected in the increased trading volumes, which also reached a new record of €2.9 billion last year.

Not all ESG is the same

There is an intense debate about what should be called ESG. Investors who want to consider sustainable criteria when choosing ETFs face different challenges than those who choose traditional ETFs: This is because not all ESG is the same. The indices on which the ETFs are based reflect different aspects of the sustainability spectrum. The focus and design approaches vary. The most popular products select companies with the highest ESG ratings in a market, while others exclude companies from certain industries and business areas, such as those related to weapons or tobacco consumption or those with high CO2 emissions. Often, compliance with specific standards is also taken as a basis, such as the UN Global Compact Principles. Companies that do not meet these standards are excluded from the index.

What’s next?

The lack of clarity about what is considered a socially responsible investment is holding back many potential investors. There are voices that want regulators to intervene and give clearer guidelines to the financial industry and investors.

Overall, it must be noted that the assets invested in ESG ETFs are still relatively small, currently accounting for around three percent of total ETF assets under management. However, it is also clear that financial experts see sustainable investment as more than just a niche. According to a publication of UNCTAD inflows into sustainable funds and ETFs will continue to rise in the coming years. Some estimates even claim that in Europe, one in three funds will be focused on ESG investing by 2030.