Investors, asset managers using ETFs to boost responsible investments
The resiliency of ESG ETFs became evident during the pandemic. Now investors and asset managers are turning more to this asset class to strengthen their ESG investments.
6 Jul 2020 | Bayani S Cruz
If there’s anything that investors and asset managers are learning quickly amidst the pandemic, it’s that they have to boost the sustainability of their portfolios and the quickest, as well as, the easiest way to do this is by investing in environmental, social, and governance (ESG) exchange-traded funds (ETFs). Sustainability is based on the principles of responsible investments (PRI) approved by the United Nations.
“Companies are suddenly aware that they need to put greater focus on the sustainability of their portfolios because of the virus. And what they saw is that in March (at height of the pandemic) ESG ETFs and mutual funds performed very well,” says Christopher Friese, head of Lyxor ETF, Asia Pacific.
Friese makes this conclusion based on flows into UCITS ETFs, including by Asian investors, who mostly used UCITs funds as a core asset class when investing in the European financial market. “I can tell you that after the virus hit, I can see a change of mind by the clients. I can see that these asset managers, insurers, and sovereign wealth funds, are putting more focus on the subject (of ESG investments) and seriously considering investments in ESG ETFs and listed products."
Although UCITS ETFs, suffered outflows of €36 billion during the February-March period, when the financial markets collapsed due to the pandemic, they have since recovered posting inflows of €12 billion as of June. These inflows include equity and fixed income ETFs.
The quick recovery can be attributed to investors and asset managers learning that the performance of ESG-focused funds, particularly ETFs, were resilient during the crisis. This resiliency dispelled the myth that ESG-focused funds underperform traditional funds because of the more selective nature of their portfolios.
“Now that the market has recovered there’s a strong trend towards fixed income ETF investments specifically on corporate bonds, driven by the latest FED policy. In that regard, we see clients coming back also on Fixed Income ESG screened products. I want to highlight that even during the market crisis in March, ESG products as a whole still collected money while everything else suffered outflows across the board. So now you can see how big the flows are into ESG ETFs this year,” Friese says.
Just by looking at the performance of ESG ETFs and ESG mutual funds, investors and asset managers have become more aware that they need to invest more sustainably going forward, Friese says.
“I think the virus situation has made clients more aware there needs to be a bigger focus in terms of sustainable investment and the quickest way to do that is by investing in ESG ETFs. They are re-evaluating their ESG investments. That’s what we see here in Asia as well,” Friese says.
This is evident by Asian institutional investors, asset managers, and corporates rushing to beef up their ESG capabilities by appointing experts focused on ESG investments.
“We are seeing that heads of ESG allocation are being appointed by our clients which means they are now evaluating these types of ESG-focused companies. We see that these clients are now seriously considering putting money into ESG investments. Previously it was more of an academic discussion in Asia,” Friese says.
In Asia, Yuanta Securities Investment Trust Co. (Yuanta SITC) launched Taiwan’s first ESG-focused ETF in August 2019. The Yuanta FTSE4Good TIP Taiwan ESG ETF is benchmarked against the FTSE4Good TIP Taiwan ESG Index, which includes companies listed on the TWSE that meet globally recognized ESG inclusion standards.
“According to the Global Sustainable Investment Alliance (GSIA), by the end of 2018, the global sustainable investment amounted to more than US$50 trillion, within which the growth rate of ESG integration into investment portfolios is the fastest,” says Julian Liu, Chairman, Yuanta SITC.
Lyxor has locally listed ETFs in Singapore but much of its business is focused on Asian clients who buy UCITS ETFs. Globally, Lyxor currently has €2 billion in ESG ETFs.
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