ESG ETF assets surge, but most miss UN sustainability goals

New figures highlight difficulty in mitigating industry-wide 'greenwashing' problem

ESG ETF assets surge, but most miss UN sustainability goals

After having to be wary of “closet indexing” funds in past years, a new analysis of ESG ETFs shows that conscientious investors must take care to avoid purchasing funds that put on an ESG facade.

Citing global ETF intelligence provider TrackInsight, the Financial Times said 2020 marked a watershed for ESG ETFs as assets under management tripled from just shy of US$59 billion at the end of 2019 to a little over US$174 billion.

A blog post from the data provider posted earlier in the month reported even higher asset levels for ESG ETFs, noting that they reached a new high of US$189 billion following 223% growth last year.

The Times said the volume of money placed in ETFs aligned with the United Nations’ Sustainable Development Goals (SDGs)saw an even greater acceleration, rising by 250% from approximately US$21 billion to US$72 billion. However, they still accounted for less than half of the assets absorbed by the wider ESG ETF space.

“There are challenges with launching ETFs targeting individual SDGs,” Kenneth Lamont, senior fund analyst for passive funds research at Morningstar Europe, told the news outlet. He noted that some goals, such as “climate action” and “responsible consumption and production,” are far easier to quantify than others such as “zero hunger” and “reduced inequalities.”

To help investors incorporate genuine sustainability into their portfolios, TrackInsight has launched ESG Observatory, an online hub that offers tools, data, and analysis on the global ESG ETF market. The hub was developed through a partnership with Conser, an independent ESG verifier, and with support from the United Nations Conference on Trade and Development (UNCTAD) and European asset-management giant Amundi.

“By looking into the impact of ESG ETFs from the SDG angle, we believe TrackInsight’s ESG Observatory can help align financial products with sustainable outcomes, and ultimately contribute to channelling finance to key SDG sectors,” James Zhan, senior director of Investment and Enterprise at UNCTAD, said in a statement.

Based on data collected from the TrackInsight-Unctad partnership, 155 SDG ETFs – the vast majority of offerings within the space – follow a climate action objective, the Times said. At a miles-behind second place were affordable and clean energy ETFs (18) followed by gender equality funds (13). Of all the SDG ETFs identified in the study, just one claims to invest in ways that tackle the problem of achieving zero hunger.

ETFs that take on niche SDGs face a steep uphill climb to achieving sustainable asset levels. As Lamont told the Times: “Even if a large enough basket of securities can be selected for these goals, the demand for each must be large enough to keep the product financially viable and prevent it from closing.”

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