ESG ETFs continue to pull in the assets

Manuela Sperandeo, BlackRock

Sustainability continues to drive ETF assets, both in bonds and equities and two firms have reported their ESG assets reaching record levels this week, with BlackRock’s iShares Sustainable UCITS EMEA ETF range crossing USD50 billion in assets, with Q1 2021 inflows of USD10 billion almost tripling the pace of asset gathering in the same quarter of 2020, and UBS Asset Management’s Sustainable Development Bank Bonds UCITS ETF reaching USD1 billion in assets. 

In a separate note, VanEck’s Bill Sokol, Senior ETF Product Manager with VanEck has written about the growth in the green bond sector. The firm launched the first green bond ETF in 2017, the VanEck Vectors Green Bond ETF ‘GRNB’. 

“Green bonds allow investors with tools to build sustainable core fixed income portfolios without significantly impacting risk and return, and leverage the vast size and diversity of the global debt markets to help achieve global climate objectives,” Sokol writes, commenting that green bonds are positioned to have another record-breaking year in issuance, as year to date issuance is already over USD100 billion, according to the firm. 

BlackRock celebrated its record increase in asset flow with the launch of two new sustainable equity ETFs that meet Article 9 under SFDR, in line with BlackRock’s expectation that 70 per cent of its fund launches and repositionings in Europe will this year qualify for Article 8 or 9. 

The iShares S&P 500 Paris Aligned UCITS ETF (UPAB) and the iShares MSCI World Paris Aligned UCITS ETF (WPAB) are designed to help investors align their portfolios with the objectives of the Paris Agreement – the international agreement to limit global warming to 1.5°C above preindustrial levels. 

The new products are designed to mitigate exposure to transition and physical climate risks, capture opportunities arising from the transition to a lower-carbon economy, and screen out exposure to businesses involved in activities such as oil and gas, thermal coal, controversial weapons, high carbon electricity generation and social norm violators. 

Manuela Sperandeo, BlackRock’s EMEA Head of Sustainable Indexing says: “As the low-carbon transition continues to transform market return expectations, we believe clients are best served by being at the forefront of that transition. This will require investors to embrace new strategies, and ETFs are playing a central role as foundational building blocks for people seeking out affordability, transparency, and convenience. Our focus remains on providing a broad and deep set of sustainable investment tools that help investors make informed choices.” 

BlackRock reports that 17 funds out of the 50 available Sustainable UCITS ETFs now have over USD1 billion in assets, up from only three funds a year ago, and globally, the firm now manages more than USD200 billion in long-term sustainable strategies, with global sustainable assets across active, index, and alternative asset classes doubling from the USD100 billion gathered at the end of March 2020. 

Meanwhile, UBS Asset Management’s Sustainable Development Bank Bonds UCITS ETF has reached USD1 billion in assets, and is the first UCITS ETF to invest in bonds issued by multilateral development banks. UBS claims that this is the largest ETF of its kind. 

UBS says that the ETF has attracted strong demand from investors who want to access a high-grade USD bond exposure with a strong sustainability profile. 

“The funds raised by development banks, such as the World Bank Group, finance projects aimed at alleviating poverty, improving infrastructure, protecting the environment, and bringing social benefits. Their activities can be seen as impact-investing, which attracts strong demand from sustainable investors,” the firm writes. 

“Development banks provide a high level of transparency on their activities and their projects are closely aligned with the UN’s Sustainable Development Goals (SDGs). Recently, they have helped address the adverse impact of the Covid-19 crisis on developing economies. The World Bank alone expects to deploy up to USD160 billion to this end until June 2021. 

“From a financial perspective, multilateral development banks’ bonds included in the ETF have very good creditworthiness certified by AAA ratings from Moody’s, S&P and Fitch. That is possible thanks to strong support from shareholders and their so-called ‘preferred creditor status’, which means they have priority over any other creditors.” 

UBS also believes that the ETF can be deployed as a sustainable replacement for USD high grade bond exposure, which forms a large portion of typical fixed income allocations. It can improve the sustainability profile of a portfolio and offers a slightly higher yield compared to duration-matched US Treasuries, UBS writes. 

Clemens Reuter, Global Head of ETF & Index Fund Client Coverage at UBS Asset Management, says: “Our clients see development bank bonds as an attractive means of improving the sustainability profile of their portfolios while supporting high-impact development projects across the world. It is their commitment to sustainability which has helped this product reach the USD 1 billion milestone. We as UBS ETF continue to innovate in this area with recent launches of Climate Aware and Paris-aligned ETFs.”  

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