European ESG ETFs Scale New Heights in September

More than half of year-to-date ETF inflows invested in ESG-focused funds, with fixed income taking growing share.

European ESG-themed exchange-traded funds (ETFs) attracted record net inflows of €3.9 billion in September, according to Lyxor’s latest monthly report, exceeding a previous all-time high of €3.7 billion, set in June.

This latest surge in investor interest means ESG-based ETFs account for more than half of cumulative ETF inflows for the year to date. European ESG ETF assets have grown by €24.5 billion in the first nine months of the year, with ETFs collectively accumulating a net total of €43.8 billion.

Lyxor’s report is based on reported flows for almost 29,000 funds in September 2020, representing 91% of all European domiciled funds and ETFs, covering €9.37 trillion in total assets.

Growth in European ESG ETF assets has been driven partly by increased activity in the fixed income sector. Although equity-focused ETFs account for approximately 80% of all inflows into ESG ETFs since January 2017 (€48 billion), fixed income ESG ETFs have seen steady growth throughout 2020. In September 2020, equity ESG ETFs gained €3.2 billion in net new assets with fixed income ESG ETFs seeing €0.7 billion in new flows.

In the year to date, fixed income ESG ETFs gathered €4.7 billion in new assets, almost twice the amount accumulated (€2.8 billion) over the same period in 2019. After a slow start to the year, the green bond market has seen strong expansion in recent months, with several major sovereign issuers coming to market, including Germany’s first green issuance in early September. The market is expected to grow at a greater pace next year, driven in part by issuance related to the European Green Deal and the EU’s €750 billion post-pandemic recovery fund.

According to an Invesco study released this week, more institutional investors are using ETFs as part of their factor strategies. A total of 60% of institutional investors said they used ETFs, accounting for 14% of their factor portfolios on average.  The Invesco Global Factor Investing Study 2020 found that factor ETF users were deploying them to deliver ESG goals but said there was a gap in the market for ETF products which can deliver on both factor and ESG-led investment objectives.

The survey also found that 36% of factor investors which had integrated ESG into their strategies had exceeded returns expectations, compared with 19% which did not. A total of 58% of institutional Investors said they had undertaken factor exposure analyses on their ESG portfolios, compared with just 34% last year.

Invesco surveyed 138 institutional investors and 100 wholesale investors, representing over US$25.4 trillion AUM in total.

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