Sustainable ETFs Gather Momentum: What's Behind The Surge

The socially responsible investment theme is in vogue. Companies that focus heavily on environmental, social and governance (ESG) practices are being craved by investors, if we go by BlackRock. No wonder, issuers have flocked to this emerging concept and are rolling out new products with full enthusiasm.

Renowned issuers like iShares, Barclays (LON:BARC) and ALPS have already made their presence felt in this category. As per Morningstar, there are over $21.4 trillion in global assets invested in this field.

What is Socially Responsible Investment?

Equities that are associated with social factors like low carbon emissions and righteous business practices come under the socially responsible theme. On the other hand, companies engaged in the manufacture and sales of products like tobacco, alcohol and arms are not considered by many socially responsible investment options (read: New Socially Responsible ETF Hits the Market, Focusing on the Disabled).

Investors appear bothered about the future of the environment, and the effect that these might have on their investing portfolio. For example, since apprehension about the death of natural resources has urged global superpowers to boost clean energy and reduce carbon emissions, investors believe that these stocks with higher ESG scores will eventually outperform.

If this was not enough, the gradual dominance of human rights has made socially sensitive ETFs like Workplace Equality ETF EQLT and Barclays Women in Leadership ETN (LON:WIL) compelling investments. As per iShares, MSCI ESG indexes both for EAFE (Europe, Australasia and Far East) and EM (emerging markets) enjoy better ratings than regular indexes, giving the former higher chances of outperformance (read: Thematic ETFs: Smarter Than Regular Smart Beta ETFs?).

New ESG-Oriented or Sustained ETFs Coming Online

Most recently, iShares launched two products. One isiShares MSCI EAFE ESG Select ETF ESGD which looks to followlarge- and mid-cap stocks in Europe, Australia, Asia and the Far East with positive ESG features. The 435-stok fund is heavy on Financials (23.15%) followed by Industrials (14.53%) and Health Care (12.49%). Japan (23%) and UK (19%) are the top two countries of the fund. The fund charges 40 bps in fees.

The second one is iShares MSCI EM ESG Select ETF ESGE focusing on emerging markets and with a tilt toward financials (27.6%) and IT (24.5%). The fund charges 45 bps in fees.

Also in June, Columbia Threadneedle launched three sustainable ETFs namely Columbia Sustainable International Equity Income ETF ESGN, Columbia Sustainable US Equity Income ETF ESGS and Columbia Sustainable Global Equity Income ETF ESGW.

No stock accounts for more than 1.48% of ESGN. The fund charges 45 bps in fees, while ESGS has an expense ratio of 0.35% and puts not more than 1.7% of the total weight in a stock. ESGW charges 40 bps in fees. Here also, the top constituent takes about 1.03% weight of the basket.

How Sustainable the Stock Performances Are?

Investors should note that the highest one-year returns were offered by Etho Climate Leadership US ETF (ETHO) and WIL in the socially responsible ETF investing space, which was up 2% (as of June 30, 2016). Yes, this return is not that great compared to many other regular-themed ETFs, but lately the wining trend has picked up.

According to Thomson Reuters, “that the amount of ESG financial data that is used in the asset management industry has risen by 45% over the last four years and represents $59 trillion of assets under management (AUM)” (read: The Guide to Socially Responsible ETF Investing).

Bright Future Ahead?

So, it can be said that the years ahead will focus more on sustained ETFs and the recently launched funds should gain considerable investor attention. This is especially true given the latest data by Morningstar which says that 70% of all investors are interested in socially responsible investing, while more than 80% of millennials seek to go socially responsible on investment decisions.