The fastest-growing segment in the ETF space

Inflows into environmental, social and governance investments have exploded over the last few years, and no one has seen this more clearly than the managers at BlackRock, the world's largest fund manager. 

The demand has been particularly apparent in exchange-traded funds, says BlackRock's relationship manager and iShares investment specialist, Blair Hannon. The team have been creating products at an amazing rate, and investors keep snapping them up. 

"Even three or four years ago, we had circa 25 products in sustainable ETFs," Hannon says. "We've now got greater than 220 products and that's continuing to grow. From an assets under management point of view, that has grown 33%, just this year to date." 

"We're now sitting around US$130 billion, which is significantly greater than the whole ETF market in Australia," he said. 

Investors are also becoming more discerning and more demanding about which ESG products they are willing to invest in. 

"Investors are saying to us that the element of something like a 'greenwashing' process — where someone's stuck the sticker on the front of a product and are calling it ESG — is not going to work," he says.

In this video, Hannon explains what's driving this mass uptake of ESG-related investments and how investors can be discerning in their choices.

It’s time to think sustainably

See how sustainable ETFs and index funds give investors the clarity they need to build sustainable portfolios here.

Edited transcript

What are the main forces driving sustainable investing? 

The thing with sustainable investing, it's not new. This has been around for a long time, but I think there's no question that there's been a coming of age when it comes to sustainable investing and that happened over the last, I'd say five years. I think there are a few core reasons for that.

Last year BlackRock did a survey of over 400 investors and that represents 25 trillion US dollars. These are big pension funds, super funds. There's also financial advisors and other types of investors.

One of the questions was 'what are you doing when it comes to sustainable investing now and what are you going to do for the future?' The results are pretty much saying, well, we're represented now and we don't think we're represented enough. Then on the back of that, the expectation was that we're going to see a doubling of sustainable investing over the next five years, towards 2025. Then we get a bit closer to home. We broke it up into the region and we looked at the Asia Pacific region.

At the moment around 50% of investors think that sustainable investing is central to their investment process, but you start to extrapolate that and you get a lot more investors thinking that's going to become central to their investment process.

On the back of that, it's really around what type of risk that they're taking on when it comes to portfolio construction and portfolio building around sustainability.

I think that's backed up when it comes to the flows. There's no question that we've seen significant flows into sustainable products, both globally and in Australia. We can look at our Sustainable Life Shares range; even three or four years ago, we had circa 25 products in sustainable ETFs. We've now got greater than 220 products and that's continuing to grow. From an assets-under-management point of view, that has grown 33%, just this year to date. We're now sitting around US$130 billion, which is significantly greater than the whole ETF market in Australia.

There's no question that it's the fastest-growing segment in our ETF space. I think partly that's because of the talk about the demand, but it's also to do with the product choice. Investors now compared to say 3, 4, 5 years ago, have that choice that if they want to build a portfolio, whether it's top to bottom of an ethical or sustainable type product, or they want to put bits of that into their portfolio, they can.

I think the last couple of points are really around where the shift has happened from a perspective of safe data and sort of the frameworks that are happening.

From a data perspective, we know that again, from five years ago, the data is so much better now. The understanding of what that data means from a portfolio's point of view is so much better so investors know what they want and they know where they can get it.

I think that sort of flows into what the frameworks are. We know that the standards and frameworks are starting to converge from a global perspective. I think this is really important because what we don't want and what we know, investors are saying to us that the element of something like a 'greenwashing' process, where someone's stuck the sticker on the front of a product and calling it ESG, is not going to work.

I think if you can buy all those pieces, we know that this sustainability trend is now really going to be ongoing. Not just the next five years, but over the next decade and in the future.

How can investors be discerning about sustainable investment options in the market? 

Whether it's an ETF or whether it's an active fund or however you are investing, I think the differences are that ESG sustainable investing is subjective compared to somewhat historically, was more an objective type of investment. 

For example, if you are investing in a market-cap weighted index, you know what you're getting. You probably trust that it's an ETF provider or it's the index provider. You know that it's a pretty basic calculation. It's the amount of share on issue times the dollar value of the shares. It's reasonably simple. Everyone can wrap their head around that.

When it comes to sustainable investing, everything's different for everyone. Some investors might want certain things and want to be down in the dark green end of what the investing process looks like. Some are happy that they're tracking closer to the index but happier on the  lighter green side.

It's really about figuring out what's right from the investment point of view for each individual investor. I think I've mentioned this point before: data is going to help many investors understand what they're looking for.

In Australia, we partnered with MSCI for our ESG ETFs and what we see is that they have really solid data across a range of facets that's helped investors figure out, okay, is that type of investment right for me? Is the screening on that going to be simple for what I'm looking for or alternatively, again, we've utilised MSCI for this. 

You can go onto our website and even our non-ESG products will have an ESG rating as provided by someone like MSCI. Again, I think it goes back to an investor understanding what they want and then being able to find what they want and how transparent that is. The data is certainly what's going to drive a lot of outcomes to a lot of clients.

Never miss an insight

Enjoy this wire? Hit the ‘like’ button to let us know. Stay up to date with my content by hitting the ‘follow’ button below and you’ll be notified every time I post a wire. 

Not already a Livewire member? Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.