Why the demand for sustainable ETFs is increasing

The share of index products in the market for sustainable funds has doubled within four years: from 7 percent in 2015 to 16 percent in 2019, as Morningstar data (as of March 2021) showed. In total, the market for pure sustainability funds is worth around $1.4 trillion, so the 16 percent mentioned above represent $224 billion. Potential for further growth should be abundant, as the share of ETFs and index funds in mature fund markets such as the US equity market alone showed. According to Morningstar data (as of December 31st, 2019), their share is 49 percent.

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High inflows and rising returns are expected

The market shifts that have occurred against the backdrop of the coronavirus pandemic should now give even more momentum to the acquisition of sustainable ETFs and index funds. In the first quarter of 2020, according to Morningstar data (as of April 1st 2020), $14.8 billion was invested in passive products geared to ESG strategies worldwide. 

The fund industry, on the other hand, suffered massive capital outflows overall. In the long term, BlackRock predicted in April 2020 (based on Morningstar data from March 2020) that the acceptance of sustainable ETFs and index funds could continue to grow. The projections contained in the forecast show just how huge the potential is. By the year 2030, the assets managed in sustainable ETFs and index funds could increase approximately six-fold to $1.2 trillion.

Given these figures, it is obvious that investor preferences are changing around the globe. Further analysis, such as the work of the BlackRock Investment Institute, suggested that the rapidly growing interest in sustainability will have a significant long-term impact on the expected returns of many investment instruments. Forecasts indicated that investments with a strong focus on energy transition, fair labor practices, and business ethics are likely to be more attractive to investors in the future than those where sustainability is not a major concern.

Better ESG data drives growth

Incorporating ESG findings into indices has long been difficult because the information provided by companies on their sustainability strategies was scarce and difficult to find. However, this is now changing – the data on which sustainable indices are based is improving. In the future, increasingly standardized ESG data will help to drive growth in sustainable index investments.

What are the main reasons for the improved data situation? Firstly, more and more companies are making ESG data available. In this way, they are helping to make their efforts to actively manage risk and create value through sustainability more measurable and communicable. On the other hand, companies now publish this information in a form that is easier for investors to compare.

Significantly lower costs than actively managed funds

In the past, investors either had to research the opportunities offered by individual stocks themselves and then book the individual stocks into their portfolios – or pay handsomely high prices for actively managed investment funds that often fluctuate strongly in performance. With the increasing spread of transparent ETFs and index funds, the costs for all investors have fallen.

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