Markets remain challenging given the possibility of recession, the peaking of inflation and the level of terminal interest rates unknown. However, one consistency is that investors returning to the equity markets in recent months have often chosen an ESG ETF exposure.
ESG funds have not been immune to the market volatility this year. Many best-in-class ESG stocks have struggled and specialised indices have fallen along with the market.
This difficult environment has served as a test for the resilience of the strategies as well as demand from investors for ESG investment. As Figure 1 illustrates, through 2020 and 2021 we saw healthy inflows into ESG funds, helped by ESG strategies posting the strongest returns versus other styles. Moreover, the higher returns were combined with relatively low volatility. During this period, we saw a rapid pace of new fund launches.
Figure 1: ESG ETF Flows Recovering from 2022 Lows
In 2022, the relative underperformance of ESG strategies stems partly from underweight positions in the energy sector (MSCI World Energy is up 30% year to date versus a fall of 22% in the broad market). Another common area of low exposure is aerospace and defence, which has been driven up by the war in Ukraine. ESG portfolios tend to have a growth bias and are more expensive, which has also been unhelpful amid rising inflation and interest rates.
Through 2020 and 2021, flows into ESG ETFs (both equity and fixed income) were driven by investors switching their core allocations to ESG-compliant equivalents. This trend gained momentum in light of the greater consideration given to social factors during the COVID pandemic. The trend was further reinforced by activity from the EU to support a climate agenda and enhancing regulations to support sustainable investing (such as SFDR), and the UK hosting COP26. Assets invested in ETFs with ESG strategies more than doubled during this two-year period.
This year, investors have had a lot to worry about. Flows slowed as investors sought higher levels of portfolio protection rather than continue switching into ESG. Focus has turned to central banks and monetary policy and their impact on economic growth.
Nevertheless, the underlying drivers of end-user demand and regulation remain supportive. Figure 1 suggests a tentative return of inflows over the two previous months and continuing in September. This is more meaningful because of the weak flows in equity and fixed income ETFs in general.
Among the SPDR range of ESG and climate ETFs are two core solutions.
SPDR S&P 500 ESG Leaders UCITS ETF neatly combines exclusions and ranking by ESG ratings while maintaining broad allocation and similar industry group weights to the S&P 500, the most popular investor benchmark globally.
SPDR STOXX Europe 600 SRI UCITS ETF tracks the performance of the leading European large cap index with a broad range of norms and product-based exclusions, including traditional oil and gas stocks, and best-in-class ESG scores.
To learn more about these ETFs, and to view full performance histories, please click on the fund names above to visit their respective fund pages.
If you would like to read more about the SPDR ESG range of ETFs, we invite you to explore our ESG capabilities page.
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For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.F: +49 (0)89-55878-440.
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