September 7, 2020

Monday Morning Memo: Review of the Growth in ESG Products in the European ETF Market (as of August 30, 2020)

by Detlef Glow.

The European ETF industry has been a true success story over the last 20 years and is set to continue its success into the future. One of the future growth drivers of the asset management industry and, therefore, also of the ETF industry, is the trend toward sustainable (ESG) investments. Regulatory requirements are forcing asset managers to evolve in an ESG-leaning direction while investor demand for these kinds of products is steadily increasing at the same time.

While ESG has gained considerable press in recent years, sustainable investment strategies are not a new trend in the European ETF industry. The first ETF with a sustainable investment strategy was launched in 2002. Even though there was not much interest in these kind of funds at that time, the launch marked the beginning of the trend towards ESG investing in the European ETF industry. It did take another 13 years, however, before we witnessed a significant uptick in the number of ESG ETFs and the assets under management in these kind of products.

The first two sustainable ETFs in Europe launched in 2002 and 2003, but they didn’t gather many assets, showing the lack of investor interest at the time. As for the lack of investor interest, it was not surprising that the European ETF industry launched only two more ETFs with a sustainable investment strategy from that point until April 2007. In May 2007, the assets under management in these four ETFs reached €104.7 m.

After reaching this landmark number in assets under management there was a steady increase in the number of sustainable ETFs in Europe, but it took until June 2013 before assets in this kind of product hit the landmark of €1.0 bn. With the launch of 14 new equity products in December 2017, the number of available products in the European ETF industry exceeded 100 (84 equity and 19 bond products), with €7.2 bn in assets under management (equity ETFs €6.2 bn and bond ETFs €1.1 bn). In September 2018, the assets under management in ETFs with a sustainable investment strategy exceeded €10.0 bn (equity ETFs €8.5 bn and bond ETFs €1.6 bn). After reaching the €10.0 bn landmark, the assets under management in sustainable ETFs increased exponentially and reached €51.5 bn by the end of August 2020. While equity ETFs held €41.1 bn, the assets under management in bond ETFs exceeded for the first time the €10.0 bn mark (€10.3 bn) at the end of August 2020. With this exceptional increase in assets under management, it is not surprising that the number of ETFs with a sustainable investment strategy increased significantly, reaching 243 equity ETFs and 64 bond ETFs at the end of August 2020.

Graph 1: Number of Sustainable ETFs and Assets Under Management (September 2005 – August 2020)

Source: Refinitiv Lipper

Assets Under Management by Promoters

Given the overall concentration of the assets under management in the European ETF industry (Please read our report: Spotlight on the concentration at the promoter level in the European ETF industry for more information on this topic), it is not surprising that the assets under management are also highly concentrated. The five leading promoters of ETFs with a sustainable investment strategy held €43.6 bn, or 84.77%, of the overall assets under management in this segment. This means that the other 16 ETF promoters with a sustainable investment strategy held only €7.8 bn, or 15.23%, of the overall assets under management.

In more detail, iShares—the largest ETF promoter in Europe overall— was also the largest promoter of ETFs with a sustainable investment approach, accounting for €18.71 bn, or 36.36%, of the assets under management. The number-two promoter was UBS ETF, with €13.4 bn, or 26.06%, of the overall assets under management, and the number-three promoter was Amundi ETF (€4.5 bn).

Graph 2: Promoter Market Share by Assets Under Management, August 30, 2020

Source: Refinitiv Lipper

Outlook

Increasing investor demand is always a good source for new growth in a specific market segment. If this increasing demand is boosted by new regulatory requirements, it almost assures that this will lead to a major trend in the asset management industry. That said, we have already witnessed a massive increase in the assets under management held by ETFs with a sustainable investment strategy. From my point of view, this marks only be the beginning of the trend toward sustainable investing as retail investors get more educated about these investment strategies and regulatory requirements force institutional investors to integrate sustainable investment approaches into their portfolios.

The increasing demand for sustainable ETFs will increase the number of promoters offering respective ETFs, as currently half of the ETF promoters in Europe have their own ESG offerings. I also assume that we will witness the market entry of a number of new ETF promoters in Europe who will specialize in ESG strategies. Taking all these circumstances into consideration, it would not be surprising if the assets under management in ETFs with a sustainable investment approach hit the €150.0 bn landmark before the end of 2025.

The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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