How to choose an ESG exchange-traded fund – FT Adviser

In the mid-2000s, environmental, social and governance funds had only just begun to blossom.

Contrast this nascent growth to what ESG funds have become today.

Their vast growth in popularity has developed in line with a growing awareness of the vital potential of finance – as an industry and as a resource – in changing the course of history.

That is, investing, developing and researching financial solutions to global climate change, and developing businesses that are more equitable and sustainable by paying attention to the social responsibility of a company and those with whom it works.

As the debates coming out of COP26 in Glasgow suggests, never before has it been more necessary to focus the lens onto global financial practices, and onto how investors can put their money where their morals are.

This sense of urgency around ESG investment and its rising popularity among retail investors may explain why exchange-traded funds have become increasingly part of the picture.

ETFs, which offer a flexible, low-cost entry point for investors into stocks and shares, are being placed under the microscope around areas such as stewardship, transparency, performance, and accessibility.

This is never more so than when examining whether ESG ETFs are an effective option for clients wanting to invest sustainably while meeting performance requirements. 

At the same time, companies are bringing ESG ETFs to market to track an ever-widening variety of indices, evaluated and reweighted along ESG risk-rated lines. 

For example earlier this year, as reported by FTAdviser, Invesco launched its Nasdaq-100 ESG ETF, which will evaluate Nasdaq companies and weight them on the basis of their business activities, controversies and ESG risk ratings from Sustainalytics, a Morningstar company.

Popularity of ETFs

The growth in popularity of ETFs is recounted by Christopher Mellor, head of EMEA ETF equity and commodity product management at Invesco.

He says there has been a “five-fold increase in ETF assets over the past decade”. Current estimates put assets under management in the ETF market at $9tn (£6.6tn) globally and rising. 

One of the most significant trends in investor behaviour in recent years has been the “shift to ESG investments and ETFs have been a part of this movement”, he says, pointing to data that states European-domiciled ESG ETFs have taken in 45 per cent of all net new ETF assets this year, up from 40 per cent of flows in 2020.

This is backed by Lidia Treiber, director of research at WisdomTree, who highlights progression in the field over the past year: “The strong demand from investors for more ESG investment solutions amid the pandemic has led to the industry responding with a growing number of new ESG-focused ETF solutions.”

According to WisdomTree, European investors are keen on putting money into ethical and sustainable passive funds.