Europe leads the $31tn charge on sustainable investing
Assets flood into ETFs designed to address matters like climate change and child labour © AFP
Richard Henderson in New York JUNE 1 2019
Anna Hyrske sits at the vanguard of a push to improve the world through financial markets. As the head of sustainable investing for Ilmarinen, the nation’s $52bn pension fund, this year alone she has dropped $1.6bn into two exchange traded funds designed to address the world’s ills — from climate change and child labour to the dearth of female executives.
ELMAT: ESG is woke
The amount was roughly split between ETF portfolios from asset manager BlackRock and DWS, the fund management arm of Deutsche Bank. The inflows instantly made both funds among the fastest growing ETFs on record, giving the Finnish fund a rare shot of attention.
“After those two launches the phone has been ringing and ringing,” said Ms Hyrske, as fund managers call to pitch ideas for Ilmarinen’s portfolio. “We are walking the walk and talking the talk.”
The two portfolios form part of a wave of sustainable investing now measuring almost $31tn in assets, according to the Global Sustainable Investment Alliance, a trade group. This includes $17.5tn managed in “environmental, social and governance” funds, an amount that has risen more than two-thirds in two years as investors, such as Ilmarinen, have reshaped their portfolios.
The funds Ilmarinen has backed offer a glimpse into the convergence of two dominant themes reshaping the investment world: the growth of sustainable funds and the shift from active portfolios overseen by professionals towards cheaper, passive strategies that track indices.
“There is a confluence of trends,” said Roelfien Kuijpers, head of responsible investments for DWS, which manages $783bn in assets. “We see more and more institutional investors, and particularly pension funds, shifting from active to passive portfolios and immediately wanting to make them fully ESG-integrated.”
ETFs account for a paltry $26bn of global ESG assets, according to EPFR Global data, but have jumped from just a few billion dollars a decade ago. BlackRock, the world’s largest investment group, estimates that this amount will rocket to $400bn over the next decade.
ESG offers one of few growth areas for fund managers who are suffering after years of outflows from active portfolios that for decades delivered attractive revenues. The shift to passive strategies, and growing concerns that asset managers are unprepared, sent stocks of fund groups in the S&P 500 down more than a quarter last year.
Much of the early running on ESG has come from Europe, where Helsinki-based Ilmarinen is typical of large Nordic institutional investors that have driven the global push in sustainable investing. Even Norway’s $1.1tn-in-assets sovereign wealth fund, which has grown through petroleum extraction, plans to drop oil and gas stocks from its portfolio as it prepares for a shift away from fossil fuels.
“European institutional investors are much more committed, and especially the Nordic institutions in countries like Finland, Norway, Sweden — they are much more advanced than others,” said Gianfranco Gianfrate, a professor of finance at EDHEC, a business school.
ELMAT: ESG has the Nordic pushing it
In the US, sustainable investing has been slower to take hold. Critics have warned that by blocking certain investments, such as shares in an oil company, investors will forgo solid profits. However, proponents argue that ESG funds can boost returns over the longer term by fastening on to trends that are transforming industries, such as climate change. As this idea has caught on, assets from US investors have flowed into ESG funds.
Momentum may soon increase in the US, as several initiatives designed to bolster sustainable investing are under way. One is a project backed by the Financial Stability Board, which aims to standardise the way companies report climate-related financial data. So far it has gained support from banks and fund managers, including BlackRock and DWS.
Such efforts could transform the ways companies report data, improving the accuracy of information that is relied upon by portfolio managers and analysts managing ESG funds.
“Companies supply their own data, essentially writing their own narratives,” said John Hoeppner, Chicago-based head of US stewardship and sustainable investments at Legal & General Investment Management America, a fund manager. “In the future, data will be more available and this will allow asset managers to create different types of exposures and different indices.”
Across the globe, meanwhile, sustainable investing is gaining traction. Ms Kuijpers of DWS said 2015 was a landmark year as fears over global warming and the success of the Paris climate accord cemented its importance in the minds of investors.
The US, for its part, is approaching “the tipping point”, said Sarah Kjellberg, the San Francisco-based head of US iShares sustainable ETFs for BlackRock. “Europe is leading the way but in the US we’re seeing signs that demand is strong.”
Back in Helsinki, Ms Hyrske of Ilmarinen is adamant that the movement makes sense.
“We’re doing this because it’s good portfolio management. It’s the proper way to deal with risk and opportunities — looking at ESG is part of your responsibility as a fiduciary,” she said. “We’re not doing this just out of the goodness of our hearts.” |
