The amount of money flowing into ETFs that take environment, social and corporate governance (ESG) factors into consideration so far this year dwarfs the amount captured in previous years, according to Luke Oliver, head of index investing at DWS, a global asset manager.
ESG ETFs have gained $19 billion in inflows so far this year versus $8 billion for all of 2019. This brings the total in ESG ETFs to $40 billion, which is still a drop in the bucket compared to the $4 trillion ETF sector but shows a growing level of confidence within investor circles, Oliver said in a recent interview.
“Seventy percent of inflows have gone into large-cap domestic stocks, proving that ESG is becoming a core part of investors’ investment strategies and portfolios," he added. "We predict continued huge growth levels in the future.”
Oliver noted that the recent news of fires, floods, corporate corruption and racism are fueling the growth because people want to invest with their values.
"These are themes that resonate with investors,” he argued.
Furthermore, investors are looking beyond their values and see ESG standards as pragmatic measures of a company’s ability to operate in a sustainable manner. “These are nonfinancial metrics that correlate to the financial stability of the company,” Oliver said.
And the greater availability of information about how companies meet ESG standards also helps propel the category.
Chris Huemmer, senior investment strategist of Northern Trust’s FlexShares ETFs, agreed that the category is going through the roof this year. FlexShares has two ESG ETF funds, the FlexShares STOXX US ESG Impact Index Fund and FlexShares STOXX Global ESG Impact Index Fund.
“Investors have come to the realization that ESG funds actually deliver market returns with less risk,” Huemmer said. “People used to think you had to settle for less in returns to invest in ESG-aware companies. No one believes that anymore.
“There has been an evolution for investors from just eliminating some companies to investing in the best-in-class in different sectors,” he added, noting that the category will continue to become more refined as more information is available.
“We look for key performance indicators and translate that into investment strategy,” Huemmer said.
Huemmer said FlexShares has numerous clients with a deep interest in ESG ETFs, and that the firm looks to add ESG products as the market grows.
"ESG ETFs could make up a slice of an investor’s portfolio, but more and more clients want ESG to make up their whole equity allocation," Huemmer said.
Schroders recently released the results of its 2020 Global Investor Study that reviewed all types of ESG investing and found that 55% of Americans now are more likely to invest in ESG products. The study examined the investing habits of 23,000 people globally.
“Higher returns, rather than just the positive societal and environmental impacts, are driving Americans’ adoption of investing in sustainable funds,” the study said. “Only 4% of those surveyed said they will not invest in sustainable funds due to a perception that the funds would offer inferior returns, which is a decrease from the 27% who said that in 2018.”
Sarah Bratton Hughes, head of sustainability for North America at Schroders, said in a statement that last year marked a turning point where it saw greater interest in sustainable investing across generations, with Gen X outpacing millennials
Throughout 2020, the Covid-19 pandemic, supply chain disruption, social unrest around inequality and damage resulting from climate change have tested companies whether they have the ability to manage their resources, the Schroders survey said. While climate change is still high on the agenda, social issues—particularly human capital management and the treatment of workers—are now at the top of Americans' concerns regarding corporate behavior.