Proportion of ESG ETFs failing to align with UN SDGs continues to grow

The number of ESG exchange traded funds (ETFs) unaligned with any of the UN Sustainable Development Goals (UN SDGs) has increased from 342 to 442 over the past quarter, according to the second edition of TrackInsight’s ESG Observatory research.

The report revealed  only three of the 17 SDGs are closely followed with climate action out in front accumulating more than half of all assets (52%) followed by affordable and clean energy and industry, innovation and infrastructure.

Globally, inflows continue to accelerate with $56.9bn added to ESG ETFs over the three months, reflecting 28% growth in assets under management and an increase of 87 funds, bringing the total to 758.

In Europe, ESG represents more than 10% of the total assets invested in passive funds for the first time, while both Asia Pacific and the Americas continue to receive positive net flows.

MSCI remains the provider of choice for ESG indices, with 52% of global AUM tied to the firm’s benchmarks, although this has fallen from 61% the previous quarter.

As with non-ESG ETFs, iShares dominates the market, holding 43% of global ESG ETF assets ($113.1bn), although it only represents 20% of the total number of funds.

The research is a combination of data from TrackInsight with methodology from Conser and mapping of funds against SDGs from UNCTAD (United Nations Conference on Trade and Development).

The report notes that as more data become available, it is expected that ESG investing in this space is going to shift to the market norm, rather than being a sub-set of the ETF universe.

SDGs which were introduced in September 2015, are designed to address global challenges including poverty, inequality, climate change, environmental degradation, peace and justice.

However, as the report notes, currently with only 10 years to go before the SDGs’ 2030 deadline, the necessary scale of resources is still lacking, and a huge funding gap needs to be bridged.

Ailing Zhang, an ETF analyst with TrackInsight, is optimistic about the future. “With the growth of global sustainable investment, policymakers and regulations have played an important role during this quarter.”

She added, “In Europe, the EU Sustainable Finance Disclosure Regulation (SFDR) came into effect this March. And in US, after returning to the Paris Agreement, President Biden has been positioning himself as a leader with the goal of reducing greenhouse gas pollution by 2030.

It will take time to examine the efficiency of these new rules towards “greenwashing”, but we firmly believe that a standardised reporting procedure based on transparency and quantification will help the decision-making process for sustainability-oriented investors.”

Virginie van Doorn, ESG Senior Project Manager at Conser commented, “ESG investments have been gaining traction and visibility throughout 2020- perhaps due to the unpredictable market environment, but investors are still having a hard time sorting the wheat from the chaff. We’re concerned that the lack of transparency is impeding the full deployment of ESG investments and are strongly convinced of the essential role independent third-party verifiers have to play in this market.”

©Markets Media Europe 2021

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