Globally, sustainable exchange-traded fund (ETF) assets reached $ 150 billion last year, 25 times higher than in 2015.
Yet despite this growth, sustainable ETFs – baskets of investments focused on environmental, social and governance issues – represent around 5% of the entire ETF universe. What makes up this rapidly growing market? What are the most common areas of investment?
To answer that question, this infographic from MSCI breaks down the universe of sustainable ETFs.
Sustainable ETFs: an overview
Overall, the scope of sustainable ETFs can vary. A sustainable ETF might be made up of cleantech companies and another might focus on the sustainable leaders of the S&P 500. Like the larger ETF market, they generally offer low fees.
Overall, the universe of sustainable ETFs can be broken down into four types of assets.
ETF asset class | Global number of ETFs | Share of total |
---|---|---|
Equity | 331 | 80.7% |
Bind | 69 | 16.8% |
Mixed assets | 8 | 2.0% |
Alternative | 2 | 0.5% |
As of December 31, 2020
Source: MSCI LLC ESG Research (February 2021)
Not surprisingly, the majority of sustainable ETFs are equity ETFs, comprising 81% of the market on December 31, 2020.
The following equity ETFs are bond ETFs, at around 17% of the total universe. A growing subset, known as green bonds, are typically used to finance environmental projects such as water management and green buildings. Here, debt issuers generate fixed income securities for investors who aim for climate goals.
Meanwhile, there are only eight funds in the world, or around 2% of sustainable ETFs, that combine more than one type of asset. Alternative ETFs, which are assets outside of stocks and bonds, are the smallest part of the universe at 0.5%.
Sustainable ETFs by approach
Next, let’s take a look at different styles of sustainable investing. In general, there are four main approaches: integration, values and filtering, thematic and impact.
ETF ESG by type | Share of total | Europe | North America | Asia | Australia |
---|---|---|---|---|---|
The integration | 40.5% | 30.8% | 50.1% | 57.7% | 28.6% |
Values and screening | 43.9% | 60.6% | 22.5% | 34.6% | 71.4% |
Thematic | 12.9% | 8.7% | 20.7% | 3.8% | 0.0% |
Impact | 2.6% | 0.0% | 5.9% | 3.8% | 0.0% |
As of December 31, 2020
Source: MSCI LLC ESG Research (February 2021)
Integration approaches, which make up 41% The universe is when investors use ESG factors to identify risks and opportunities that can improve long-term performance. A best-in-class method, which invests in leaders in a given sector, is a form of ESG integration approach.
In the United States, the 24 largest equity ETFs that follow this approach have approximately $ 25 billion in assets.
At the lower end of the spectrum, 3% of all sustainable ETFs follow impact approaches, which cover investments that provide solutions to environmental and social issues. Investments that fall under this approach may have frameworks that target the United Nations Sustainable Development Goals.
Sustainable ETFs by domicile
What are the main sustainable ETF launch markets?
When it comes to the prevalence of sustainable ETFs around the world, Europe is leading the way. With more than half of all sustainable ETFs, Europe outperforms North America by a significant margin. Of the 40 ETFs with assets exceeding $ 1 billion, 26 are domiciled in Europe.
ETF by Domicile | Number of ETFs | Share of total |
---|---|---|
Europe | 208 | 50.7% |
North America | 161 | 39.3% |
Asia | 25 | 6.1% |
Australia | 14 | 3.4% |
Other | 2 | 0.5% |
As of December 31, 2020
Source: MSCI LLC ESG Research (February 2021)
Although covering around 6% of the total number of ESG ETFs, interest in sustainable investing is strong in Asia. Notably, a study found that 79% of institutional investors in Asia-Pacific increased their investments in ESG-related assets “significantly” or “moderately”.
Understanding the carbon intensity of sustainable ETFs
Finally, let’s take a look at how the carbon intensity of sustainable ETFs breaks down. Carbon intensity measures the amount of carbon dioxide equivalent emitted in relation to a company’s income.
ETF carbon intensity | Share of total | Average carbon intensity, tonnes of CO2 equivalent / million USD of sales |
---|---|---|
Very slow | 5.7% | 0 to |
Low | 18.4% | 15 to |
Moderate | 50.1% | 70 to |
High | 18.4% | 250 to |
Very high | 7.4% | 525 to |
As of December 31, 2020
Source: MSCI LLC ESG Research (February 2021)
The carbon intensity of the average business varies considerably from one sector to another.
Interestingly, less than 6% of sustainable ETFs had the lowest carbon intensity levels, from 0 to 15 weighted average tonnes of CO2 equivalent (WACI). Among the lowest carbon ETFs, there was one that placed more emphasis on banking, insurance and financial services.
In contrast, sustainable ETFs with the highest carbon intensity levels made up over 7% of the total universe, with these funds holding higher shares of mining and utility companies.
In all sustainable ETFs, 58% fell in the moderate range of 70 to 250 WACI.
At the crossroads
Sustainable investing may be one of the most critical movements of the past decade for the financial sector.
But at the same time, concerns about greenwashing are increasing. To counteract this trend, the European Union has put in place new rules on what constitutes a sustainable fund. Here, investments will be mainly qualified as sustainable or not. It could become a global standard.
For investors who want to invest in sustainable ETFs, the importance of research and data providers will play a more concrete role, especially as the universe continues to expand.
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