Writing Assignment

Author

Okung Obang

Executive Summary

  • Within the MSCI Index, there are 33 ESG ETF funds with a total of $60.2 billion USD in net assets.

  • Despite ESG ETFs being smaller in number and total net assets, they have proven to have a higher growth percentage at their peak than regular ETF funds.

  • ESG ETF funds on average have a lower net expense ratio compared to regular ETF funds.

Introduction

Issues of sustainability and ESG metrics have become increasingly visible within the financial world. The introduction of an ESG focused index and a number of ESG assets entering the index have appeared over the years, but the at the heart of this, many wonder if ESGs are a suitable investment vehicle. Noting the common characteristics of ESG ETF funds, it is a good idea to keep track of this nascent industry with decreasing expense costs as markets become more primed to ESG metrics.

The Current State of ESG Markets

The ESG ETF market is becoming increasingly more common within the MSCI index, primarily with equity asset classes.

The ESG market, albeit considerably smaller than the traditional fund market, has had more entries in the market following 2016. Within the MSCI Index, there are 33 ESG ETF funds and 360 traditional ETF funds, according to iShares’ MSCI Index. As seen in Figure 1, the number of ESG funds have increased significantly since 2016, as 5 ESG ETF funds entered the MSCI index in 2016, alongside the adoption of the Paris Accord. In 2020, ESG ETF fund entries peaked with 20 funds joining the MSCI index. Among all the registered ESG ETF funds, most of these funds as concentrated as equity assets, with 22 funds classified as such in Figure 2.

Figure 1

Figure 2

ESG vs. Traditional Funds

While traditional funds have a larger total net assets, ESG funds have shown to have a high percentage of growth at its peak compared to traditional funds. As shown in Figure 3, ESG funds total net assets are only fractions of the total net assets of traditional funds, with $60.2 billion versus $2.1 trillion respectively. But, the average growth rate of ESG ETF funds reached a little over 6% at its peak in 2016 as shown in Figure 4. In comparison, the average growth rate of the traditional ETF funds were only a little over 3% at its peak around 2000 in Figure 5.

Figure 3

Figure 4

Figure 5

Expense Costs of ESG vs. Regular Funds

ESG ETF funds have, on average, lower net expense ratios than traditional funds of the same year. This is notable as ESG ETF funds have trended to have lower net expense ratios than regular ETF funds as shown in Figure 6. This is beneficial for asset managers who seek to include funds that have lower costs over time for a long term basis.

Figure 6

Conclusion

Despite that ESG ETF funds are notably smaller in number and overall total assets than regular funds, ESG ETF funds show to be a promising investment in terms of growth and lower costs than regular funds. As more ESG-centric funds enter the MSCI index, it might be worth investing into newer ESG ETF funds for potential greater returns than regular ETF funds.