Low-carbon ETFs Expected to Grow in Popularity Next Year – Cerulli

Issuers betting on climate-related passive investments, but predict declining demand for negative screening.

Exchange-traded funds (ETFs) that focus on minimising carbon usage will be among the most popular ESG-based passive investment options in Europe in 2021, according to a new report by research and consulting firm Cerulli Associates.

In a survey of ETF issuers conducted by Cerulli, 86% of respondents said portfolio holdings that focus on limiting carbon usage or being free from fossil fuels would to be the most popular approach for incorporating ESG factors into ETFs over the next 12-24 months.

Exclusions and negative screenings are expected to be less popular, with 54% and 46% respondents respectively believing demand for these approaches will increase.

Vehicles with a thematic focus on environment and impact were the other ESG-based ETFs expected to enjoy greater demand over the coming years, with 73% and 70% of respondents respectively forecasting increased demand.

By the end of August 2020, European ESG ETF assets reached €49.7 billion (US$58.3 billion), a 69.1% increase from the end of 2019, according to data from service provider Broadridge. Equity ESG ETFs accounted for €40.4 billion of the total and fixed-income ESG ETFs for €9.3 billion, the report said.

“In March, at the height of the COVID-19 pandemic, the European ETF market experienced €25 billion of net outflows, yet investors continued to put assets into ESG ETFs, which saw €700 million of net inflows during the month. Although these products still represent a small proportion of the European ETFs ecosystem, going forward they are expected to receive more interest from investors and asset managers are having to keep up with clients’ evolving demand,” said Fabrizio Zumbo, Associate Director of European asset management research at Cerulli.

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