Bloomberg Intelligence’s (BI) Global Asset Managers Outlook has found that ESG ETF assets and flows could continue to see strength from Europe in the year ahead, driven by favourable policies, while the US weakens.
Fund launches are slowing, which could continue as the market matures, the firm found. ETFs designated as Article 9, Europe’s ESG class with the highest sustainability credentials, will likely drive flows, the team writes, but the ESG category risks being diluted as the number of funds that classify themselves as Article 8 but don’t label themselves as ESG increases.
Shaheen Contractor (ESG Research Analyst) and Athanasios Psarofagis (ETF Research Analyst) at BI say: “ESG and values-based ETF assets slid around 16 per cent this year to USD395 billion in 3Q, driven by market contraction and large one-off outflows that also dominated 1H. We think concentration risks, not scepticism, drove the outflows. And while this eased into 3Q, we think the concentrated nature of inflows and outflows may result in continued swings in flows, which could slow asset growth in the long run if large investors exhaust allocations. While US assets have weakened, Europe showed comparative strength – something we think will continue, driven by regulations.
“Fund launches showed signs of slowing and are likely to continue to deaccelerate as a downturn dominates fears and the ESG market matures with most large asset managers having strategies in place.”
Climate ETFs face risk of oversupply: ESG ETF Flow Tracker
The potential liquidations among climate ETFs that Bloomberg has ‘called out’ are materialising, with at least five shutting shop, and could continue as oversupply tests demand and slower flows drive less-competitive strategies to close. Clean-energy flows spiked in 1Q21 but have cooled, according to the firm’s tracker. Flows into low-carbon/fossil-free ETFs have slowed, too.
The team writes: “While the Inflation Reduction Act supports clean-energy flows over the long term, we don’t think it will be enough to sustain last year’s pace. About 100 climate ETFs have launched until through 3Q, fewer than the 180 in 2021, though it’s still double any other year. Low carbon/fossil-free climate themes that aren’t as impacted by the act may face higher liquidation risks.”
Article 9 ETFs may gain flows as investors seek most sustainable
ESG and values-based ETF flows slid more than broader funds through 3Q this year than the same period a year ago, driven by weakening in the US as Europe showed strength. Based on the firm’s sentiment model, flows could slow further. Funds classified as Article 8 that don’t label themselves as ESG will likely grow and risk diluting the category. Flows were about USD53 billion, with Article 9 taking 36 per cent as investors look to the most-sustainable funds, which could continue. However, funds are being downgraded to Article 8, and that may gain pace as more transparency under reporting rules invites scrutiny next year.
Under the EU’s Sustainable Finance Disclosure Regulation, managers must classify funds into one of three categories. Article 8 funds promote environmental or social characteristics. Article 9 targets sustainable investment.
