Despite misgivings about ESG investing and issues over ‘greenwashing’ investors in Europe have continued to back the exchange-traded-strategies in their own portfolios.
Analysts from Hargreaves Lansdown revealed that since January 2017, the number of its clients holding ETFs has increased almost 80%, from 5.1% of the total client base to 9.1% in June 2022.
The proportion of clients holding ESG ETFs has grown nearly 708% – from 0.12% to 1.05% over the same period.
Alexander Watkins, passive investment analyst at HL, said that the acceleration in investor interest in ESG ETF products has been driven by the emergence of specialist benchmarks.
Examples include the Paris Aligned Benchmark and Climate Transition Benchmark from index providers such as MSCI and FTSE.
These indices exclude fossil fuels and instead are made up of stocks which have committed to reduce carbon.
“As ETFs have historically taken a whole of market passive approach, investing bespoke ESG indices through this wrapper is blurring the divide between passive and active investing,” he said.
“Fund managers are also increasingly expected to engage with the fund’s underlying companies to improve their ESG credentials.”
How do ESG ETFs fit into a responsible portfolio?
When considering ESG factors in portfolio construction, it is not just about managing risk but also highlighting opportunities, according to Tara Clee, ESG analyst at HL.
Clee said: “An ETF focused on carbon reduction will have exposure to companies making more progress reducing carbon emissions than most of the other companies in its industry.
“These businesses are less likely to be impacted by future climate policies and carbon taxes and are more likely to be exposed to the opportunities of the low carbon economy such as government incentivization.”
She added that the core-satellite approach is a sound option when its comes to building a responsible portfolio.
“The core usually forms the bulk of the portfolio and is usually made up of a number of funds. It’s complemented by smaller ‘satellite’ investments, possibly in higher-risk areas,” said Clee. “We think any satellite investment should usually only form a small part of a well-diversified portfolio.
“A core holding could be a diversified global ESG tracker for example, which acts as part of the backbone for a responsible portfolio. More niche investments, such as renewable energy funds should be kept for satellite holdings.”
