The ESG ETF market is worth around 61 billion USD, but it only represents 2.8% of the overall ETF market share, with North American equity funds being the primary players.
ESG ETFs experienced steady growth between 2013 and 2020, but the COVID-19 pandemic and its impact on financial markets caused a decline in development.
Assessing the profitability of funds is difficult since, despite having lower expense ratios, older ESG firms have yet to see asset growth.
Introduction
In recent years, ESG investing has gained traction as investors increasingly prioritize the social and environmental impact of their investments. As a result, ESG ETFs have grown in popularity and number. ESG investing has emerged as one of the fastest-growing sectors in the global ETF industry and is rapidly transitioning from a niche to a core investment category in many professional and individual investor portfolios.1 Thus, making it essential to evaluate the ESG ETF Markets.This report aims to provide an overview of the ESG ETF landscape, identify key trends in the growth and assess their financial and sustainability performance compared to regular ETFs. 2
State of the ESG ETF Market
The ESG ETF market primarily centers around equity assets and is relatively smaller than regular ETFs, with North American taking the lead in ESG ETF assets. The ESG ETFs account for only 2.8 % of the total ETF market. However, as of 2022, the total assets under the management of ESG ETFs is approximately 61 billion USD (Figure 1). Most of these assets primarily fall under equity, followed by fixed-income investments (Figure 2). Furthermore, these assets are concentrated mainly in the North American and Global ESG ETFs, with Global ETFs comprising only equity assets. Thus, indicating the slow uptake of ESG integration in fixed-income and other asset classes. ESG Integration in fixed income is essential because the lower liquidity of the fixed-income market can cause a notable impact on the price in the occurrence of a significant ESG incident.3
Code
# if you haven't installed the tidyverse yet, uncomment the next line and install it before loading the library: # install.packages("tidyverse")library(tidyverse) # assign the url to `github_raw_csv_url`github_raw_csv_url <-"https://raw.githubusercontent.com/t-emery/sais-susfin_data/main/datasets/blackrock_etf_screener_2022-08-30.csv"# read in the data, and assign it to the object `blackrock_etf_data`blackrock_etf_data <-read_csv(github_raw_csv_url)blackrock_etf_data <- blackrock_etf_data |>mutate(across(contains("date"), lubridate::mdy)) |>mutate(net_assets_usd_bn = net_assets_usd_mn/10^3) |># this column doesn't add anything to our analysis - it says that the data is from 8/30/22rename(co2_intensity=msci_weighted_average_carbon_intensity_tons_co2e_m_sales) |>rename(MSCI_ratings=sustainability_characteristics_msci_esg_fund_ratings_msci_esg_fund_rating_aaa_ccc)|>select(-net_assets_as_of)library(ggplot2)# Barplotcolor_list <-c("ESG Fund"="lightblue", "Regular Fund"="skyblue4")bp<-ggplot(data=blackrock_etf_data , aes(x="",y=net_assets_usd_bn, fill=is_esg))+geom_bar(width =1, stat ="identity")bp+scale_fill_manual(values = color_list)+labs(title =" Figure 1:Size of ESG Vs. Regular ETF Market",x ="",y ="Net Assets Under Management(Billions USD)",fill="Fund Type",caption ="Source: Blackrock | Latest Data:08/30/2022 | Calculations by Aishwarya Jadhav")
Code
mini_blackrock_data <- blackrock_etf_data |>filter(is_esg =="ESG Fund")|>select(ticker, name, asset_class, sub_asset_class, region, incept_date, net_assets_usd_bn,years_from_inception,location,market,year_launched,MSCI_ratings,co2_intensity)color_list <-c("Global"="lightblue", "North America"="skyblue4")ggplot(mini_blackrock_data) +geom_bar(mapping =aes(x = asset_class, fill = region, y =net_assets_usd_bn),stat ="identity")+scale_fill_manual(values = color_list)+labs(title ="Figure 2:ESG Funds by Asset Class across Regions ",x ="Asset Class",y ="Net Assets Under Management(Billions USD)",fill="Region",caption ="Source: Blackrock | Latest Data:08/30/2022 | Calculations by Aishwarya Jadhav")
Growth of the ESG ETF Market
The number of ESG ETFs had been consistently growing over the past seven years but experienced a decline in 2020 . ESG ETFs multiplied from 2013 to 2016, more than doubling in size. The market size peaked during this time due to asset growth and an increase in the number of funds.4 However, there has been a sharp decline in the market size since then, which remains volatile. The drop in ESG ETFs since 2020 may be attributed to the impact of the COVID-19 pandemic and its ripple effects on the financial markets. Additionally, the inflation rise and the Fed’s subsequent interest rate increase may have exacerbated the drop in ESG ETFs as investors would be prompted to seek out less volatile and risky assets.
Code
mini_blackrock_data|>ggplot(aes(x =year_launched)) +geom_density(fill="darkolivegreen2",color="darkolivegreen3",alpha = .6)+labs(title ="Figure 3: Growth in the Number of ESG Funds",x ="Years",y ="Density",caption ="Source: Blackrock | Latest Data:08/30/2022 | Calculations by Aishwarya Jadhav")
Code
ggplot(data =mini_blackrock_data,mapping =aes(x =year_launched, y=net_assets_usd_bn)) +geom_line(color="darkolivegreen3")+geom_area(fill="darkolivegreen2",alpha=.6)+labs(title ="Figure 4: Growth in Net Assets Under Management of ESG Funds",x ="Years",y ="Density",caption ="Source: Blackrock | Latest Data:08/30/2022 | Calculations by Aishwarya Jadhav")
Profitability of ESG ETFs Vs. Regular ETFs
Although the size of ESG ETFs has yet to see significant growth over the years, their lower expense ratios suggest greater profitability. The growth of net value assets under management and the expense ratio have been utilized as profitability measures over time. Figure 5 shows that ESG ETFs are considerably smaller than traditional ETFs. Furthermore, older traditional ETFs usually have more assets under management (AUM) than older ESG ETFs. A lower AUM generally suggests reduced investor confidence and implies that the fund carries a higher risk. Figures 6 and 7 indicate that ESG ETFs potentially offer greater profitability, as evidenced by their lower range and median values for both growth and net expense ratio. This could be attributed to ESG ETFs charging lower fees to attract investors, resulting in lower expense ratios. Moreover, as ESG investments are typically geared towards long-term investors, cost-efficiency is highly valued, with lower-cost funds being preferred due to their potential to save money over the long haul and maximize returns. However, since the two metrics provide distinct results, it is challenging to determine definitively which fund is more profitable.
Code
blackrock_etf_data|>ggplot(aes(x = is_esg, y = net_assets_usd_mn, color =years_from_inception)) +geom_point(position ="jitter") +labs(title ="Figure 5: Net Assets Under Mangement of ESG Vs. Regular ETFs",x ="Fund Type",y ="Net Assets Under Management (Billions USD)", color="Age of ETF (years)",caption ="Source: Blackrock | Latest Data: 08/30/2022 | Calculations by Aishwarya Jadhav")
Code
ggplot(data =blackrock_etf_data , mapping =aes(y =is_esg, x = net_expense_ratio_percent)) +geom_boxplot() +coord_flip()+labs(title ="Figure 6 : Net Expense Ratio of ESG Vs. Regular ETFs",x ="Net Expense Ratio(%)",y ="Fund Type",caption ="Source: Blackrock | Latest Data: 08/30/2022 | Calculations by Aishwarya Jadhav")
Code
ggplot(data =blackrock_etf_data , mapping =aes(y =is_esg, x = gross_expense_ratio_percent)) +geom_boxplot()+coord_flip()+labs(title ="Figure 7 : Gross Expense Ratio of ESG Vs. Regular ETFs",x ="Gross Expense Ratio(%)",y ="Fund Type",caption ="Source: Blackrock | Latest Data: 08/30/2022 | Calculations by Aishwarya Jadhav")
Sustainability of ESG ETFs Vs Traditional ETFs
Overall, ETFs focusing on environmental, social, and governance (ESG) factors tend to have more favorable sustainability outcomes than regular ETFs. To assess the sustainability of ESG ETFs and avoid greenwashing, the MSCI ESG ratings and CO2 intensity were utilized. Figure 8 illustrates that the majority of ESG ETFs receive high sustainability ratings (A-AAA), while several conventional ETFs are rated below B. Furthermore, ESG ETFs exhibit significantly lower carbon intensity than traditional ETFs. Interestingly, smaller ETFs generally have a higher carbon intensity in both scenarios.
ggplot(data = blackrock_etf_data,mapping =aes(x = net_assets_usd_bn, y = co2_intensity)) +geom_line(color="skyblue4")+facet_wrap(~is_esg, ncol =1)+labs(title =" Figure 9: Average Carbon Intensity of the Fund",x ="Net Assets Under Management( Billions USD)",y =" MSCI Weighted Average Carbon Intensity(tCO2e/$M sales)",caption ="Source: Blackrock | Latest Data:08/30/2022 | Calculations by Aishwarya Jadhav")
Conclusion
In conclusion, the analysis of ESG ETFs presents an encouraging outlook for the future. Despite experiencing stagnant growth, ESG ETFs possess unique features highly attractive to investors. The high sustainability outcomes and lower expense ratios make these funds a promising investment option. However, there is still a considerable disparity in market size across different regions and asset classes, highlighting the need for a concerted effort to boost growth in these areas. Moreover, the ESG market is still in its infancy, requiring a more extensive data pool to draw conclusive results. The figures provided in the report show that much more work must be done to fully realize the potential of ESG ETFs.
While the current state of ESG ETFs presents some challenges, the potential benefits for investors and the environment make it a promising investment option. With continued efforts to boost growth and enhance data collection, ESG ETFs can significantly promote sustainability and drive positive change in the investment industry.
