ESG: ETF Investors Consider This Sustainability Share to Be Optimal

Interest in sustainable passive investment products is growing. Find out now which ESG share German investors consider sensible.

According to a recent survey commissioned by Invesco, German retail investors consider a portfolio allocation of 35 percent in ETFs with an ESG focus to be ideal. The majority (54 percent) of German retail investors plan to increase exposure to ESG ETFs over the next three years.

Of the investors not currently invested in ESG ETFs, 80 percent would consider such exposure in the next three years. According to Invesco, for ESG ETFs to become more prevalent in the future, knowledge gaps need to be filled first and foremost.

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Investors embrace ESG ETFs

The Invesco survey, which polled 1,000 German retail investors, shows that many investors are using ETFs to invest in ESG issues. Nearly three-quarters (74 percent) of those who invest in ESG use ETFs for at least some of that exposure, and among these investors, ESG ETFs account for more than one-third (38 percent) of total portfolios.

In addition, the survey found strong interest in expanding sustainable exposure in the coming years. Among investors who already invest this way, the majority (54 percent) expect to expand their exposure in the future, while only 6 percent intend to reduce it.

Among those who do not currently invest in ESG ETFs, Invesco found a strong receptiveness to these investment products, with a majority (80 percent) saying they plan to consider investing in ESG ETFs in the next three years; 16 percent said they would not. Here, interest is similar across all portfolio sizes and appears to be largely independent of investment experience.

“E,” “S,” and “G” vary in importance

When asked about the relative importance of the categories – “E” for environment, “S” for social, and “G” for governance or good corporate governance – there was a clear winner: for 38 percent of German investors, environmental aspects are a priority, followed by governance (23 percent) and social aspects (17 percent). In this context, 32 percent of respondents identified the promotion of renewable energies as the most important environmental factor. In second and third place came the protection of natural resources and biodiversity (23 percent) and the prevention of pollution and waste (19 percent).

The most frequently cited social factor (30 percent) was respect for human rights by preventing exploitative labor practices. This was followed by fighting poverty and inequality (23 percent) and promoting diversity, equality and inclusion (19 percent) in second and third place, respectively.

In the governance area, investors placed the most importance on appropriate compensation and incentives for executives at the companies in which they invest. This was cited as the most important factor by 34 percent of respondents.

Closing the knowledge gap

Despite clear investor interest in using ETFs for sustainable engagement, the survey showed that German investors would like more information, both about the products available on the market and about the positive real economic impact of investing in sustainability ETFs.

The top reason for not investing in ESG ETFs cited by nearly one-third of respondents (32 percent) was the feeling that they did not know enough about the options available to make such an investment. This was followed in second and third place by an inability to find an ETF that matched their values (29 percent) and a preference for an active ESG approach (21 percent).

When asked what would most encourage investors to increase their exposure to ESG ETFs, 35 percent of respondents cited a better understanding of whether their investments are having a positive impact. This aspect was thus even more important to them than the prospect of higher returns compared to other investment options (32 percent).

The need for information can also be gleaned from respondents’ knowledge of available products. Environmental products with easy-to-understand, clear themes – wind and solar strategies, for example – are familiar to most investors. By contrast, respondents were less familiar with ‘traditional’ ESG ETFs with more technical investment terminology: bringing up the rear were strategies based on negative screening, with only 11 percent of investors familiar.

German investors cited the ability to build differentiated ESG exposure through ETFs alone as the most important reason for investing in ESG ETFs (40 percent).

“The market for ESG ETFs has grown so much and spawned so many innovative approaches that these products can play an important and versatile role in investment portfolios, regardless of investors’ objectives,” says Sam Whitehead, Head of EMEA ETF ESG Product Management at Invesco.

“The growth potential of this market is far from exhausted. The main reason investors we surveyed did not invest in ESG ETFs was simply a lack of understanding of these products – in other words, a clear challenge for our industry to address.”

ETF inflows reflect interest in sustainability

The German survey is part of a larger Invesco survey of 5,500 investors in seven European markets – Germany, Great Britain, France, Spain, the Netherlands, Sweden and Switzerland . The report on this survey, available from Invesco, compares the implementation of ESG and ESG ETFs in the various markets and illustrates a great interest in sustainable passive strategies across Europe.

This demand is also reflected in recent developments in inflows into EMEA ETFs: in the last three years, almost half of these have been into sustainability-focused products. Such ETFs now make up more than 19 percent of the market, up from just 3 percent at the beginning of this decade.

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(Featured image by Scott Graham via Unsplash)

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First published in extraETF. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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