As investment strategies focused on sustainability and environmental, social and governance factors draw scrutiny, exchange-traded funds are leaning on quantitative methodologies and portfolio transparency to continue to attract assets. That's all the more crucial with regulators sharpening their focus on fund processes and marketing.
According to data from London-based research firm ETFGI LLP, global ESG ETFs gathered $97.4 billion in net flows through the end of July, $8 billion more than the entirety of 2020, while closing that month with $309 billion in total assets. And as more pension funds and endowments move to drive their portfolios to net-zero or align with diversity goals, expect ESG ETFs assets and products to grow with those institutional investors.
Take Harvard Management Co. In a recent letter to members of the Harvard community, Harvard University President Lawrence Bacow reiterated the endowment's goal of a net-zero portfolio by 2050, yet HMC still reports $45 million in broad-based equity ETF holdings that could be replaced by similar offerings with lower carbon intensity.
Many other institutional investors and large financial intermediaries have found room in their portfolios for both domestic and international index ETFs that also incorporate ESG factors. For example, Blackrock Inc.'s $22.4 billion iShares ESG Aware MSCI USA ETF has added $5.9 billion in net flows through Sept. 10, according to FactSet Research Systems Inc., while Vanguard Group Inc.'s $5.3 billion Vanguard ESG U.S. Stock ETF has added $1.5 billion. Though both funds cover the U.S. market, their market-cap coverage and exclusion levels diverge.