Exchange-traded funds ( ETFs ) may be the key towards fast-tracking sustainable investments in Asia-Pacific and achieving the goal of net-zero emissions under the Paris Agreement.

This is based on the fact that sustainable ETFs have skyrocketed in terms of volume, particularly over the past 12-18 months, as well as their growing popularity among all types of investors who are finding these instruments easy to use, more cost-effective, and versatile for their sustainable investing requirements.

Geir Espeskog, co-head of sustainable investing APAC and head of iShares APAC distribution, says: “ETFs help democratize sustainable investing. The growing number of ETFs really enable investors to do broad-based ESG ( environmental, social and governance ) investing, as well as increasingly allowing [them] to customize portfolios around specific areas such as climate investing, or investing for net zero, or reducing carbon exposure, prioritizing carbon transition, or targeting themes such as clean energy.”

Globally, there are now about 600 sustainable ETFs, up from just 30 ETFs a decade ago. In the United States alone, BlackRock’s sustainable ETFs have grown five times since 2019. Its iShares currently has the world’s broadest ETF platform with the number of its sustainable ETFs doubling to 150 ETFs in the past 12-18 months with over US$133 billion in assets under management ( AUM ).

“The number of ETFs and index funds seems to be increasing every week when I try to count and it’s 171 when I last checked this morning,” says Sunita Subramoniam, head of sustainable for iShares and index investments APAC. “But I think it’s not just about the AUM and number of products increasing. If we can look at this number more broadly across the industry, in 2014 the money that was going into sustainable ETFs and index funds was only about 6% of the entire pie in ETF and index funds. Fast forward to 2020, that number is 24%. So a quarter of the money that went into ETFs and index strategies has chosen to go into sustainable strategies.”

Based on these trends, investment in sustainable ETFs and index mutual funds is expected to triple to US$1.2 trillion in the next 10 years.

Success stories

“We feel quite simply that indexing is something that works really well for sustainability and investors all around the world are recognizing that. It’s really these immense success stories, the collaborations that we’re seeing between ourselves as an asset manager and large investors around the world who are looking to us to collaborate and create interesting, sophisticated and varied sustainable strategies. Our green bond strategies, our low carbon transition rating strategies, our ESG and factors strategies, for example,” says Subramoniam.

The factors that are contributing to the surge in sustainable ETFs include:

• Increasing transparency among companies which are disclosing more sustainability-focused data.
• The increased data disclosure is allowing index providers to create more ETFs using various sustainable strategies, including broad-based, thematic, and best-in-class strategies.
• Investors are recognizing that sustainability doesn’t detract from returns but can actually influence risk and return, especially for investors with a forward-looking perspective.

“All of these factors put together are the reason why we’re seeing such a momentum in sustainable investing – basically investing through the ETF world,” Subramoniam says.

Different preferences

Investors in sustainable ETFs are quite diverse, including asset owners, private banks, wealth managers, and asset managers. Their preference for the types of sustainable ETFs to invest in also varies.

“With some of the larger investors in the region, what we’ve seen is that they want to have sustainable strategies that are still quite benchmark-aware but at the same time incorporating sustainable considerations like emissions, ESG scores, and so on. So we’ve seen a lot of success with our optimized strategies, whether they are ESG-optimized or carbon- or factors-optimized, for example,” Subramoniam says.

“For private bank and wealth management clients, what really resonates with them is the best-in-class strategies. What I mean by that is really concentrated ETF strategies with the best scoring ESG companies. Those have been very successful in APAC. Some of the thematic and impact strategies have resonated with clients across the board, which is one of the reasons we saw immense flows going to things like clean energy and green bonds because investors in this region have really recognized that these themes are going to be the so-called winners as we transition to a low-carbon economy,” she says.