Introduction to ESG ETFs I

Rahul Bhushan

15 years: Structured Products and Sustainability

In this video, Rahul discusses the rise of ESG ETFs, which have amassed $378 billion in assets by February 2022, aligning investments with strong ESG values. He differentiates ESG investing from impact investing and anticipates future regulations like the EU's Sustainable Finance Disclosure Regulation to enhance transparency and credibility in the ESG ETF market.

ESG Financial Markets

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Introduction to ESG ETFs I

17 mins 53 secs

Key learning objectives:

Outline the emergence of socially responsible investing (SRI) and ESG
Understand why ESG has been adopted by investment managers
Understand why ESG ETFs emerged
Outline the size, types and outlook of the ESG ETF market
Understand the different types of ESG investing and how it differs to impact investing
Outline how future regulation will continue to evolve

Overview:

The growth of ESG ETFs is deeply rooted in the history of Socially Responsible Investing (SRI). Originating in the mid-20th century, SRI was a response to ethical concerns, leading investors to omit sectors like tobacco based on moral stances and was heavily shaped by faith-based investing. As time progressed, SRI broadened to include environmental, social, and governance (ESG) factors. Due to this, ESG ETFs emerged, mirroring broad market indices but focusing on companies with strong ESG adherence. The surging demand for ESG has seen a diversification of strategies, from integration and divestment to engagement and impact investing. By 2022, ESG ETF assets reached $378 billion. Due to the exponential growth in sustainable investments, regulatory measures, like Europe's Sustainable Finance Disclosure Regulation, have been introduced to combat potential greenwashing, aiming for a transparent and standardised ESG landscape.

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Summary

Why did socially responsible investing emerge, and what role did faith based investing play and how did this lead to ESG?

Socially Responsible Investing (SRI) originated as a response to ethical concerns in the mid-20th century, with momentum building in the '60s when investors began excluding sectors like tobacco based on moral grounds. At the time, faith-based investing sought to direct funds away from contributors to conflicts like the Vietnam War, targeting peaceful and just companies. This mentality paved the way for the broader ESG framework, incorporating environmental and governance considerations alongside social factors.

Why was ESG adopted by investment managers?

Investment managers recognised the increasing global concerns regarding environmental challenges, social inequalities, and corporate governance failures. By integrating ESG risk management, they saw potential for enhanced, sustainable returns. This perspective was bolstered by initiatives like the United Nations' Global Compact, which stressed the importance of integrating sustainability and ESG risk into financial strategies.

Why did ESG ETFs become so popular?

ESG ETFs have grown in populatory due to their ability to align investment strategies with environmental, social, and governance principles. Unlike traditional ETFs, ESG ETFs prioritise companies with strong ESG credentials while minimising or divesting from those with poor ESG compliance. The combination of broader market exposure and responsible investing attracted a significant investor base, boosting their popularity.

What is the size of the ESG ETF market, what types are there and what is the outlook?

The ESG ETF market, as of February 2022, commanded assets worth $378 billion. The market primarily segments into Broad Market ESG ETFs, Thematic ESG ETFs, and Thematic Impact ETFs. With heightened global sustainability consciousness and robust industry standards, the future of ESG ETFs remains promising, particularly in regions like Europe with advanced ESG awareness.

What are the various types of ESG investing and how does it differ to impact investing?

ESG investing integrates environmental, social, and governance factors into investment decisions. It comprises strategies like ESG integration, divestment, voting and engagement, and is about aligning investments with sustainable practices and risk management. In contrast, impact investing specifically targets measurable positive social or environmental outcomes. While both prioritise sustainability, impact investing goes a step further by actively seeking tangible positive change.

How will future regulation continue to evolve and influence the ESG ETF market?

To counter concerns like greenwashing, future ESG regulation will prioritise transparency, consistency, and accountability. Instruments like the European Union's Sustainable Finance Disclosure Regulation (SFDR) are already setting the pace by mandating clear ESG disclosures. Collaborative efforts between regulators and industry stakeholders are expected, ensuring the creation of robust regulatory frameworks. This evolution will reinforce investor confidence and shape a sustainable financial ecosystem.

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Rahul Bhushan

Rahul Bhushan, a seasoned asset manager with over a decade of experience, has a proven track record in building ETFs, including Europe's first battery technology ETF, an e-commerce ETF, an environmental impact ETF, and a sustainable food and agriculture ETF. His expertise in product development, strategy, research, sustainability, and client delivery, coupled with his willingness to "take bets" on finance trends, has enabled him to provide unique perspectives and solutions to investors, resulting in better investment outcomes. Currently, he is co-founder and managing director of ARK Invest Europe, a London-based asset manager and ETF provider specialising in thematic and sustainable ETFs for European investors.

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