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AUM in European ETFs doubles with Europe leading the way in ESG investing, says latest Morningstar report


Assets under management in European-domiciled ETFs have more than doubled over the past five years to EUR760 billion at the end of March 2019, according to a Morningstar report on ETFs.  

The Morningstar report – A Guided Tour of the European ETF Marketplace – finds that European ETFs now account for 8.6 per cent of total AUM in European investment funds, up from 5.5 per cent five years earlier. In the first quarter of 2019 alone, net flows totalled EUR26 billion, thus auguring another bumper year for the ETF marketplace.

Morningstar reports that passive funds could account for 25 per cent-28 per cent of the European investment fund market by 2025, up from 17.3 per cent at the end of March 2019. The report also notes that the trend in favour of low-cost investment solutions is well-entrenched and assets could reach EUR2 trillion by 2024, under the positive assumptions of accelerating inflows and upward-trending market prices.
In terms of investment in ESG ETFs, Europe is leading the way. “The overall trend towards ETF investing is reflected in the ESG space and while ESG ETFs have been late to the party, they are now catching up,” says Hortense Bioy (pictured), European Director of Passive Strategies and Sustainability Research at Morningstar.
In 2018 assets in ESG ETFs grew by 50 per cent to EUR9.95 billion with 36 new products coming to the market, up from 15 in 2017. So far in 2019, 10 new ESG ETFs have been launched. While the bulk of the ESG ETF offering is in the equity space, there have been several fixed-income launches, too. Also, providers like JPMorgan and Ossiam have used their in-house research capabilities to launch actively managed ETFs.
Many providers now offer a core set of ESG-focused ETFs, offering varying approaches to ESG integration and hard exclusions.
The report also notes that while the bulk of the fee cuts have been in the mainstream equity ETFs, there has also been increased fee competition in the field of ESG-focused ETFs. In fact, the launch in 2018 of aggressively priced ETFs by iShares, Xtrackers, and L&G was something of a milestone. Ongoing charges now range from 0.05 per cent to 0.20 per cent, meaning that investors can buy a range of sustainable portfolio building blocks without having to pay a premium for the privilege.
The report finds that all providers listed are becoming more active in ESG and stewardship issues.
“We have found that all the major ETF providers are becoming more active in the sustainability space,” states Bioy, explaining that the advantage of passive funds is that they tend to be more transparent anyway; by reading the rules of the index, it is possible to understand how the portfolio incorporates ESG factors.
Morningstar has identified five key areas that are crucial to predicting the future success of funds: process, performance, people, parent, and price. In the report there is heavy focus on stewardship issues. For example, reporting that most ETF providers have expanded their stewardship teams and intensified their engagement efforts, including Vanguard which has dragged its feet with respect to investment stewardship.
According to Bioy, ESG investing in Europe, especially in the Nordics, is more developed than other regions. “Regulation is a significant driver in the increase of ESG-focused products. Key legislation initiatives include the EU Sustainable Finance Package, which was unveiled a year ago, and the revised European Shareholder Rights Directive (SRD II), which is due to come into force imminently,” adds Bioy.
The aim of the SRD II is to enhance transparency and communication thereby improving public awareness and understanding of index managers’ stewardship activities.
With increased interest in sustainable investing and concerns about the impact of the growth of indexing on corporate governance, scrutiny of index managers’ stewardship practices is intensifying. Europe’s largest ETF providers are increasingly taking an active role in the oversight of the companies they invest in, through proxy voting and engagement. That said, stewardship approaches vary across providers.
According to Bioy, voting and engagement is improving but more can be done in terms of disclosure. “Transparency on voting and engagement is key for investors to hold their managers accountable. At the moment, while Europe is leading the way on ESG issues, it is lagging on proxy voting disclosure. In Europe it is more difficult to find out how an asset manager has voted than in the US, where it is an SEC requirement for asset managers to publish this clearly on their website. We need to see better reporting practices from asset management companies in general.”

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