Fourth quarter 2022 insights from Qontigo, revealed that the ESG segment of the total global passive ETF market is just 4.7 per cent but accounted for more than 10 per cent of all net new assets across the industry in 2022.
Melissa Brown, Global Head of Applied Research at Qontigo says: “This is research we do every quarter and it started as a way to provide intelligence to ourselves to understand what is going on in the ETF market to make decisions about index products that we can sell but it has expanded beyond that as we realised the intelligence we were gathering had appeal to other stakeholders.”
The global study of the full year of 2022 threw up a number of interesting finds, Brown says, not the least that investors continued to buy ETFs even though the market was going down, she notes.
“Buying passive ETFs makes sense if you are worried about the market but want to stay in it,” Brown says. “You want to stay as diversified as possible.”
She also notes that money flowed into bond ETFs. “It’s not surprising in that it was hard to justify putting money into bonds a year and a half earlier but now rates are coming up and looking like they are going to stay that way and bonds have become an attractive alternative to stocks – more so than they have been for many years, so it’s justifiable for investors.”
ESG dominated AUM growth for passive ETFs in 2022 growing 5.6 per cent whereas non-ESG funds fell 5.9 per cent, according to the Qontigo Q4 ETF Intelligence Insights report. And ESG continues to dominate new ETF launches in EMEA, the firm says, reporting that of the 755 ETFs launched in 2022, 27 per cent had an ESG focus. Of 253 new ETFs in EMEA over the period, almost 47 per cent, were ESG. This rate was only 17 per cent and 16 per cent for the Americas and APAC, respectively.
Investors poured money into passive ETFs, Qontigo reports. Net new assets reached EUR552 billion over the 12 months and contributed the equivalent of 7.2 per cent of AUM. Investors shunned active funds, selling a net EUR1 trillion from the investment vehicles over 2022, or 3 per cent of assets.
Brown says: “A lot of the equity money was going into ESG funds which was largely concentrated in Europe, although I think ESG is less of a huge draw in the US at the moment but we still see a growth opportunity in this market.”
She comments that the indices and ETFs in the ESG space have been built to be well diversified with an ESG tilt to them. “It makes a lot of sense if you are looking for diversification and broad index access but want to make that ESG statement and commitment.
Investors in the US are concerned that an ESG approach to investment will impact on returns, Brown believes. “Will limiting my investment universe mean giving up returns, is a concern,” she says. “And that has been the case as energy prices have gone up and many of these funds have lower exposure to energy.
“I think there are many things that will drive more investors to more environmentally friendly type investments such as climate change or younger people who seem to be more focused on ESG as they build assets to put into these types of funds,” Brown says.
She also observes that ESG providers are trying to be as sensitive as possible to as to what the market is looking for, making sure that they are offering the right products.
“Another concern is greenwashing and ETFs are going to have to really prove that they have better ESG characteristics. We are working closely with clients on that in developing indices that meet sustainable investing definitions,” she says.