Sustainable ETF assets jump but most funds fall short on UN goals

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Assets in exchange traded funds that claim to invest according to environmental, social and governance principles recorded exponential growth in 2020, but only a fraction of those ETFs were aligned with sustainable development goals developed by the UN, research shows.

Assets under management in ESG ETFs jumped three-fold from just under $59bn at the end of 2019 to just over $174bn at the close of 2020, a rise of nearly 200 per cent, according to data from TrackInsight, the Financial Times’ data partner for the ETF Hub.

There was a greater still 250 per cent increase in the volume of money invested in SDG-aligned ETFs over the year, which rose from under $21bn to about $72bn, but the total was less than half of that attracted by the broader ESG universe.

“There are challenges with launching ETFs targeting individual SDGs,” said Kenneth Lamont, senior fund analyst for passive funds research at Morningstar Europe. “While some like ‘climate action’ and ‘responsible consumption and production’ may be more easily captured, others like ‘zero hunger’ and ‘reduced inequalities’ may be trickier.”

The UN adopted the 17 SDGs in 2015 with the stated mission of achieving a better and more sustainable future for all in 2030.

Despite the difficulties, the United Nations Conference on Trade and Development (Unctad) has collaborated with TrackInsight to produce a tool, which launches on Monday, that helps investors to search for ETFs that are directly aligned with SDGs.

“One of the aims behind the collaboration is to address the issue of green washing,” said Joseph Clements, economic affairs officer for investment at Unctad, referring to investment products that make false claims to have good ESG credentials. “There are a lot of products that do not match up to the label of sustainable,” Mr Clements added.

The TrackInsight-Unctad research shows that the vast majority (155) of SDG ETFs are following a climate action objective, followed by affordable and clean energy with 18 ETFs and gender equality with 13. Only one ETF has been identified that claims to invest in ways that address the sustainable development goal of achieving zero hunger.

Chart showing number of SDG ETFs

To compile the database, TrackInsight researchers scrutinise the fact sheets and other publicly available information of all ETFs in the ESG universe. The information is screened for statements that show an explicit tilt towards specific sustainable development goals.

 “The idea behind the tool, which is public, was to help investors make better decisions,” said Anaëlle Ubaldino,head of ETF Research and Investment Advisory at TrackInsight. The tool allows investors to click through to more in depth information about each ETF including a general ESG score.

Mr Lamont warned that ETFs following particularly narrow SDGs could struggle to build scale. “Even if a large enough basket of securities can be selected for these goals, the demand for each must be large enough to keep the product financially viable and prevent it from closing,” Mr Lamont said.

He also questioned whether ETFs were also the best wrapper for a sustainable investment approach. “The limitations of ETF investing mean that investors seeking the most sustainable impact may be better served by active managers,” he said.

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