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The majority of exchange traded fund launches in Europe over the next year will use an environmental, social or governance tilt for their construction, according to a new report.
Of the some 60 ETF providers that responded to a global survey carried out by PwC, 80 per cent in Europe say more than half of their products will invest with an ESG angle.
The report, which forecasts that the ETF market will double globally from $10tn today to $20tn by 2026, concludes that European providers are feeling the pressure to invest with an ESG tilt because of investor demand and regulation.
Marie Coady, global ETF leader at PwC, said product innovation in the ETF sector was at an “all-time high”, adding that a lot of it was being driven by investor demand for ESG.
“People are creating more bespoke indices and tracking areas that investors are really, really interested in, and that’s driving more innovation and moving ETFs away from the historic passive indices that we would have seen,” she said.
Participants in Europe are feeling “the strongest pressure for change”, according to the report.
In Canada, 46 per cent of providers say that more than half of their products will have an ESG tilt, while the figures for Asia and the US are materially lower, respectively at 38 per cent and 28 per cent.
In Europe, however, ETF providers face regulatory challenges, including a “plethora of ESG designations and reporting requirements in different markets,” according to the report.
Compliance with article eight and article nine under the EU’s Sustainable Finance Disclosure Regulation could be problematic for those ETFs that fully replicate broad cap-weighted or thematic indices, said PwC.
As in other parts of the asset management industry, the report said issuers also faced challenges securing reliable and consistent data and uncertainties in relation to ESG ratings and scoring.
“There are implementation challenges for index-tracking ETFs at the moment with SFDR, but the alignment of regulations for managers together with the alignment of regulations for index providers, will certainly give ETF providers the ability to obtain the data that they require in order for ETFs to meet their pre-contractual and periodic disclosure requirements under SFDR,” Coady said.
She added that this would also help them with stewardship, an area where active asset managers claim they have an edge.
“I think the same level of diligence can be done [as at an active manager] and I think as ETF managers look at bespoke indices construction that they are going to be able to really overlay the level of stewardship and diligence that they would otherwise in an active strategy,” Coady said.
Regulatory requirements were also expected to increase in the wake of pledges made last year at the United Nations climate change conference, said PwC.
The consultant said investor pressure could also come from elsewhere, as a key target market would be the Gen Z and millennial generations making increasing use of online platforms.
Other areas of the market ripe for innovation are the cryptocurrency, active ETF and thematic spaces, according to the report.
Of the survey respondents, 46 per cent of providers in Europe said they would like to launch a crypto ETF in their primary geographic location if permitted, a far greater number than any other region.
*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.
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