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Passive funds to take even bigger bite of ESG amid $48bn green ETF boom

Majority of institutional investors expect a major part of their ESG holdings will be held in passive, index-tracking products over the next five years.


Investors have been piling cash into environmentally themed exchange traded funds, and the boom looks set to speed up amid the global pandemic.


Some 55% of institutional investors expect that the majority of their ESG holdings will be held in passive, index-tracking products over the next five years, according to Invesco.


While only about one in five assets of those who already have ESG exposure are already in passive products, some 45% plan to boost that exposure in the next two years. Only 5% plan to decrease holdings in passive products, the research found.


And more than two thirds of those surveyed say the Covid-19 pandemic is speeding up this trend. Indeed, a 23 July survey from EY found that 76% of finance executives say the coronavirus recovery will “supercharge” the sustainable finance agenda in the UK.


It is a jarring finding for active managers, who have been hoping to make the most of the trend toward sustainable investing. This year has been tough — stock pickers must justify their higher fees to analyse and hand pick winners for clients.


Their performance is expected to be worth those higher costs. But data in July showed passives outperformed their active peers during the pandemic — even though rocky markets tend to be a prime footing for stock pickers.


The overwhelming weight of academic evidence shows that stock pickers are “very poor at market timing”, David Blake, a professor in the finance faculty of City University in London, told Financial News at the time.


“Most outperformance is down to luck, not skill,” said Blake. “It takes a very long period of performance data to distinguish skilled managers from lucky ones.”


Finance giants are piling in. BlackRock and UK insurance firm Scottish Widows in early August announced a £2bn semi-passive climate fund focused on low-carbon initiatives.


The venture will mean the pension portfolios of up to six million UK customers being invested in the fund manager’s new low-carbon fund.


The fund is a semi-passive offering, based on the MSCI World index, but with a systematic screening process


Since 2015, flows from Europe, the Middle East and Africa into ETFs incorporating ESG criteria have boomed from about $4bn to $48bn as of June of this year, Invesco found.


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