Climate-linked factors top ETF investor demand, says Cerulli

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European investors are prioritising climate-linked products in an ETF format, according to Cerulli Associates. Targeting portfolio holdings that focus on minimising carbon usage or being free from fossil fuels is set to be the most popular approach to incorporate ESG factors into ETFs, the firm says, with 86 per cent of the ETF issuers in Europe that responded to a survey believing it will be the case.

By the end of August 2020, European ESG ETF assets reached EUR49.7 billion (USD58.3 billion), a 69.1 per cent increase from the end of 2019, according to Broadridge data. Equity ESG ETFs accounted for EUR40.4 billion of the total and fixed-income ESG ETFs for EUR9.3 billion.

Cerulli research indicates that exclusions and negative screening are likely to be less popular with ETF issuers: only 54 per cent and 46 per cent of survey respondents respectively expect demand for these approaches to increase in the coming 12 to 24 months.

“In 2019, ESG ETFs domiciled in Europe collected a total of EUR16.1 billion of net new money from investors. With net flows of EUR19.1 billion in the first eight months of 2020, last year’s total has already been exceeded,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli. “In March, at the height of the COVID-19 pandemic, the European ETF market experienced EUR25 billion of net outflows, yet investors continued to put assets into ESG ETFs, which saw EUR700 million of net inflows during the month. Although these products still represent a small proportion of the European ETFs ecosystem, going forward they are expected to receive more interest from investors and asset managers are having to keep up with clients’ evolving demands.”

During the first half of 2020, several ETF issuers launched innovative propositions in the ESG space, Cerulli says. “The European market has taken the lead on embedding ESG matters in investment practice. The EU’s taxonomy on sustainable finance and other legislation will further strengthen the ESG push.”

“Managers and investors are also starting to recognise the positive effect ESG considerations can have on investment returns,” says Zumbo.

The firm reports that August was another positive month for passively managed assets in Europe. However, the net inflows of EUR13.7 billion were down 39 per cent on the previous month. ETFs attracted EUR8.9 billion in net sales in August, half of which can be attributed to bond ETFs (EUR4.5 billion). Equity ETFs, the month's second best-selling asset class, attracted EUR3.7 billion.

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