A new report from Bloomberg Intelligence (BI) has found that ESG ETF investment flows could double this year after a record first quarter.
ESG ETF inflows in the first quarter hit a record USD54 billion, equivalent to 60 per cent of total flows last year putting the sector on course to double this year, the report says.
The adoption of the EU’s new taxonomy rules on green investments provides an opportunity for managers to develop climate products with new launches already from UBS, BlackRock and Amundi, the report notes.
However, the surge of funds into clean energy could increase the overall volatility of ESG investing as clean energy ETFs are more cyclical and experienced big declines in 2020 during the downturn.
“Asset managers will have to compete harder in the expanding ESG ETF market. Funds that offer unique strategies at minimal cost are likely to draw the most interest while flows to complex themes tend to be cyclical,” says BI ESG Analyst Shaheen Contractor.
Thematic ESG and sustainability funds, BI say focusing on simpler concepts such as low carbon or fossil free tend to be cheaper to manage than ones focused on issues such as sustainable development while complex funds tend to have higher fees and fess are likely to be squeezed by increased competition, BI says.
The BI report, ESG and Values Based ETF Flow Tracker, notes that clean energy ETF flows were around 40 per cent of total ESG flows in January before slipping back to 10 per cent in February. Flows tend to follow performance and clean energy goes through cycles which could hit ESG ETFs as a whole, according to BI.
North America is narrowing the gap with Europe on flows and launches although Europe still leads thanks partly to a range of ETFs focused on climate change, the report adds.