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Supplements » ETF Report March 2021

ETFs: Against a complicated backdrop


Matthieu_GuignardESG AND THE ROADMAP TO SUSTAINABILITY

Matthieu Guignard, Global head of product development and capital markets at Amundi ETF, Indexing & Smart Beta

The past 12 months have shown us that investors across the board are really embracing ESG – and we believe that with political and regulatory focus in 2021, this growth is set to continue.

Europe has been, and continues to be, at the forefront of the regulatory agenda when it comes to ESG – not least with the implementation of the EU Action Plan. This is focused on directing capital to a sustainable economy, placing sustainability at the heart of risk management and focusing on transparency and long-termism.

The first application of this transparency is just around the corner, with SFDR [the Sustainable Finance Disclosure Regulation] coming into play. This is positive for investors as it helps clarify what is, and isn’t, ESG and enables them to make informed choices. It is important to remember that the choice of fund is just one tool in the passive investor’s toolkit – the selection of an asset manager is also key, ensuring that the voting and engagement practices are aligned with overall investment goals.

2020 was a strong year for passive ESG strategies, with record flows and ETF launches; over half of net ETF inflows in Europe were directed to funds incorporating ESG values and more than 40% of European ETF launches were in this space.

For 2020, we saw three key drivers of growth in ESG: strong performance, a risk reduction tool and forthcoming regulation. In 2021, we don’t anticipate any slowdown of the interest in sustainability. In fact, with a Biden presidency, the European Green Deal and other key drivers, we may see the trend accelerate further.

Within ESG, the Covid-19 crisis has focused attention on the ‘S’ in ESG as the pandemic has highlighted prevailing social inequalities and renewed the focus on how companies treat their employees.

Another area of increasing focus for investors will be how asset managers engage with the companies in which they invest. More and more investors want to know how asset managers vote at AGMs (annual general meetings) and how their dialogue influences companies regarding ESG. This is an interesting development in passive investing, given the need to replicate an index. By embracing engagement, asset managers can influence businesses and drive positive change.


Timo_ToengesACCELERATING ADOPTION

Timo Toenges, Head of EMEA iShares business strategy, BlackRock

ETFs have completely revolutionised the world of investing. More people than ever can invest towards their goals affordably and efficiently, and there is growing recognition of the role ETFs are playing in building more resilient markets.

Driving greater understanding about this valuable role that they play in portfolios and in the capital markets will continue to require ongoing focus, even as the European ETF industry grows. Past experience shows us that each time ETFs are tested and pass during periods of market volatility, more investors learn about and become open to the role they can play in portfolios and become first-time users. Furthermore, studies show that when investors start using ETFs, they tend to increase usage over time and become long-term adopters.

As the adoption of ETFs in Europe accelerates, we see three drivers of the next phase of growth. Firstly, the inescapable shift towards a ‘whole portfolio’ approach that aims to identify true sources of portfolio returns is putting a spotlight on the role of indexing and ETFs. Secondly, the evolution of the European wealth industry is triggering a rethink of old habits and encouraging more people to consider and use ETFs for the first time. And thirdly, innovations in ETFs are playing a leading role in the seismic shift to sustainable investing and, following the resilience they showed during the pandemic-related market turmoil of early 2020, changing the way investors own fixed income. Together, these will see ETFs transform even more sectors and break new boundaries in 2021


Kenneth_LamontTHE COMPELLING CASE FOR WATER

Kenneth Lamont, Senior analyst, passive strategies, Morningstar

Thematic ETFs in Europe emerged as one of the big winners in 2020; eye-catching returns helped attract a record €9.5 billion in net new assets across the year. These strong flows helped assets under management more than double from €8.2 billion to an all-time high of €22.7 billion. One-third (€3.1 billion) of all thematic ETF net inflows were poured into energy transition-themed funds over the course of the year. The disruptive volatility experienced in the oil markets led many to seek alternatives and to revaluate the associated risk and return of alternative energy sources. The favourable US election result and other pro-environmental political developments globally were also supportive.

Water ETFs were not one of the big winners in 2020, which makes them a good longer-term buy. Water ETFs are my ones to watch this year. The case for investing in water is compelling, particularly over the medium to long term. Fresh water is not distributed equitably across population centres, nations or regions. Moreover, given its weight, water is not easy to transport in sufficiently large quantities. As populations continue to grow, supply and demand for water is set to become progressively more imbalanced, especially in arid regions with contaminated water. For regions with easily accessible water resources like rivers and underground aquifers, the risk of overconsumption and inefficient recycling are real threats to the sustainability of these resources. These constraints pose a global profit opportunity.