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PORTFOLIO PERSPECTIVES | ARTICLE – 2 Min

Shifting expectations among investors on ETFs

In this article:

    Investors we have surveyed expect the European market for ESG[1]exchange-traded funds (ETFs) to continue to expand over the coming year. They showed particular interest in strategies incorporating low-carbon, Paris-aligned benchmarks (PABs). The investors surveyed also expressed renewed confidence in sustainability labels.  

    Our twice-yearly survey, first conducted in April 2022, monitors the evolution of the outlook and practices of European institutional and intermediary investors with regard to sustainable investment in index strategies. The latest edition in the second half of 2022[2] highlighted the following points:

    Rising trends 

    • 66% of investors consider that the ETFs currently available on the market show real sustainability benefits such as a positive impact on ESG issues. This opinion is widely shared by Swiss investors (74%), against 54% of respondents in Italy, and by 85% of pension funds compared to 56% of asset managers.
    • 67% of investors consider ESG voting and engagement policies to be robust. Active dialogue to support companies in their ESG transition was of particular note.
    • Interest in low-carbon, emissions reduction or PAB-aligned strategies has risen sharply over the past six months, from 14% to 36%, with some notable disparities between countries:  48% of Swiss investors are particularly interested in this theme, compared to 20% in France. Other interesting themes include battery innovation, hydrogen and the electrification of transport, increasing from 8% to 33%.
    • The three most important criteria investors use when selecting ESG ETFs are sustainability labels and certification (18%), the management company’s ESG credibility and expertise (15%) and tracking error against the benchmark (14%). 

    Falling trends 

    • 81% of investors expect ESG ETF assets under management to remain stable or grow over the next 12 months, compared to 91% in the previous survey.  This decline may be explained by performance in 2022. The most optimistic respondents were in the UK (96%), while the least optimistic ones were in Germany (68%).
    • Investor demand slowed for ETFs investing in the circular economy (26%, compared to 61% in the previous survey) and the blue economy (down to 32% from 48%), in contrast to growing demand for low-carbon and alternative energy.  

    In our view, the results show that investor expectations can change quickly depending on market conditions and regulatory developments. 

    In this changing environment, sustainable index strategies continue to attract significant inflows[3], particularly those aligned with the objectives of the Paris Agreement.

    We see extensive scope for further growth in low-carbon ETFs and index funds, both on equities and fixed income indices. We have been at the forefront of ESG ETF innovation since 2008 when we became the first asset manager to launch a low-carbon ETF.

    Since then, we have steadily expanded our thematic ETFs range.

    For more articles on exchange-traded funds, go to the ETFs category on Viewpoint

    References

    [1] Using environmental, social and governance criteria  

    [2] Survey conducted in November 2022 on behalf of BNP Paribas Asset Management by Longitude, a Financial Times company. Respondents included asset managers and asset owners based in France, Germany, Italy, Switzerland and the UK.  

    [3] ESG strategies accounted for 65% of all European ETF inflows in 2022, according to Morningstar data, up from 53% in 2021.

    Disclaimer

    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
    Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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