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Interest in socially conscious investing has surged amid Covid-19, with institutional investors saying the pandemic will lead to a rapid growth in exchange-traded funds with exposure to ESG (environmental, social and corporate governance), according to a new survey.
More two-thirds, or 68 per cent, of institutional investors said the pandemic will accelerate the development and take-up of ESG investments over the next two years, the study said.
The survey, conducted by investment management firm Invesco, also found that 55 per cent of institutional investors believe the majority of their ESG investments will be held in passive products, such as ETFs by 2025.
“In the Middle East, we have seen certain investor segments further rethink their strategy post-Covid-19, as clients push to adopt ESG principles into investment processes,” said Alessio Cirillo, sales director at Invesco EMEA. “While climate change has been a growing concern among regional investors over the last two years, the global Covid-19 pandemic has really brought forward the social focus of ESG investing.”
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Institutional investors with ESG exposure in their portfolios said that, on average, 21 per cent of those assets are currently held in passive vehicles such as ETFs, while 45 per cent plan to increase the amount they invest in ESG ETFs over the next two years. Only 5 per cent said they plan to decrease passive exposure, the study said.
ESG ETFs and exchange traded products saw net inflows of $32 billion (D117.5bn) globally in the first six months of 2020, according to data from research and consulting firm ETFGI. This is more than triple the $10bn in inflows witnessed during the same period last year, taking overall assets to a record $88bn.
"Funds that seek to play on sustainable investing trends are likely to outperform, but investors should spread their risk through index-tracking, low-cost ETFs, rather than gambling on individual stocks," Vijay Valecha, chief investment officer at Century Financial, said.
The Invesco research also found that investors are no longer only considering the carbon footprint of companies before investing in them. Other core ESG issues such as employee welfare, access to healthcare, corporate culture and supply-chain sustainability have been in the spotlight during the pandemic. Investors consider these actions to be indicators of a sustainable corporate culture.
“Investors are looking more and more towards investments that align with their sustainability preferences and values. ETF providers have responded by offering an expanding range of ESG ETFs,” Mr Cirillo added. “For example, they can exclude companies in undesirable industries or with poor ESG scores or they could tilt the profile to reward companies that are industry leaders on key ESG issues.”
According to analysis of EMEA market flow data by Invesco, ETFs incorporating ESG criteria have been growing rapidly over the past five years, from $4bn in assets under management in June 2015 to about $48bn at the end of June 2020.
“For the growing number of investors looking for funds with ESG considerations, it is clear that ETFs are playing an increasingly central role in helping them gain exposure,” said Gary Buxton, head of EMEA ETFs and indexed strategies at Invesco. “Investors are often first attracted to ETFs due to their low costs and simplicity, but as we have seen so far this year, ESG ETFs have also been able to deliver on performance objectives.”
The S&P 500 ESG Index has returned 8.5 per cent as of September 4 this year, versus 6.1 per cent for the S&P 500. In the UAE, the newly created S&P/Hawkamah ESG Index has had a 9.3 per cent return for the three-month period ending September 6, versus 4.9 per cent for the DFM General Index during the same period.