Especially as assets continue to flood into ETFs
With COP26 in full swing and ETF Stream’s Big Call: ESG Investors Forum event just around the corner on 17 November, it is critical the ETF industry recognises its key role in mitigating the impact of climate change and ensuring the goals of the Paris Agreement are met.
The ETF market in Europe has developed rapidly over the past few years and now totals over $1.5bn assets under management (AUM). The major story of the last 24 months has been the rise of sustainable investing. This is a trend that is here to stay, highlighted by the €99bn inflows into ESG ETFs in Europe since the start of 2020, as at the end of Q3, versus €25bn in the three years between 2017 and 2019, according to data from Morningstar.
While ESG ETFs can vary greatly depending on the strategy be that exclusions, best-in-class or impact, the release of climate ETFs that track the two European Union benchmarks, the Paris Aligned (PAB) and Climate Transition (CTB), has given the space new impetus when it comes to taking direct action against the impact of climate change and aiding in the transition to net-zero emissions.
In particular, this is achieved by the metrics built into the indices. ETFs linked to the PAB, for example, employ an initial carbon intensity reduction of 50% versus the parent universe as well as a forward-looking annual decarbonisation rate of 7% which is in line with the aims of the Paris Agreement.
The world’s largest ETF issuer BlackRock has even added the EU’s CTB to its more vanilla ESG enhanced ETF range which is home to six ETFs with $9bn AUM. Expect more issuers to join BlackRock in adding climate metrics that are aligned the Paris Agreement’s 1.5°C trajectory to ESG strategies in the future, driven by increasing institutional investor demand.
As Manuela Sperandeo, head of sustainable indexing, EMEA, at BlackRock, said: “Investors can help support a successful response to climate change through their portfolio choices. Our focus continues to be on aligning ESG ETFs with emerging standards in sustainable investing and offering clients more choice when seeking to implement their sustainability goals.”
Furthermore, the role of thematic ETFs in enabling investors to access more focused sustainable exposures such as clean energy or the blue economy is another space that is developing rapidly. According to the International Energy Agency, annual investments in clean energy and infrastructure must total around $4trn a year, up from $1trn today, if the world is going to achieve 1.5°C targets.
As a result, infrastructure ETFs, such as the Global X U.S. Infrastructure Development UCITS ETF (PAVE) which launched last week, look set to benefit from the need to meet sustainable targets. This has already been recognised by President Joe Biden and the US Senate, which passed the $1.2trn Infrastructure Investment and Jobs Act on 10 August. (Hear more about this during ETF Stream’s webinar in partnership with Global X on Wednesday.)
While regulation such as SFDR will be crucial in ensuring products are labelled correctly, greenwashing remains the biggest challenge that will hinder the asset management industry’s push to a more sustainable economy.
As assets into ETFs increase, the industry must be cognisant of its role and resist simply adding an ESG label to a product in order to cynically gain more assets as this will impact the ESG ETF space’s long-term growth.
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