- Invesco research reveals that 35% of UK retail investors’ ideal portfolios would be allocated to ESG ETFs as interest in sustainable passive strategies grows.
- The majority (51%) of UK retail investors intend to increase exposure to ESG ETFs over the next three years, and 88% of those that currently do not invest in ESG ETFs say they would consider doing so.
- Overcoming the ‘knowledge gap’ is key to further ESG ETF adoption.
UK retail investors would ideally allocate 35% of their total portfolios to ESG ETFs amid rapidly growing interest in sustainability-focused passive strategies, according to research from Invesco.
The research, based on the views of 1,000 UK retail investors, shows widespread adoption of ETFs as a way of gaining exposure to ESG themes. Nearly three-quarters (72%) of those that invest in ESG use ETFs for at least some of that exposure, and of those investors, ESG ETFs account for more than a third (38%) of their overall portfolios.
Additionally, the research uncovered substantial interest in growing ESG ETF exposure over the coming years. Among all UK respondents, the majority (51%) said they expect their exposure to increase, versus just 6% who intend to reduce it.
For those that do not currently invest in ESG ETFs, Invesco observed a widespread open-mindedness: an overwhelming 88% said that they would consider investing in ESG ETFs over the next three years, with just 9% saying they would not consider doing so. Levels of enthusiasm are similar across all portfolio sizes and levels of investing experience.
Breaking down the “E”, “S” and the “G”
When asked which of the “E”, “S” and “G” is most attractive, there was a clear winner: environmental considerations were selected by 39% of UK investors, followed by governance (28%) and social (19%). Supporting the development of renewable energy was the most compelling environmental factor, selected by 31% of investors, followed by the preservation of natural resources and biodiversity (22%) and prevention of pollution and waste (22%).
The most commonly cited social factor was the upholding of human rights by preventing exploitative labour practices, selected by 32% of investors. This was followed by deeply-held ethical considerations, such as religious beliefs or animal welfare (20%) and the promotion of diversity, equality and inclusion (19%).
Within governance, investors placed most importance on investee companies encouraging appropriate executive remuneration and incentives. This was seen as the most compelling factor and was chosen by 32% of respondents.
Wealthier investors tended to heavily favour environmental and governance considerations. Just 8% of investors with portfolios of £100,000 or more prioritised social considerations, compared to 42% that selected environment and 33% that selected governance. Conversely, among those with portfolios under £5,000, 25% identified social considerations as most important, ahead of governance (20%).
Overcoming the ’knowledge gap’
While investors are clearly interested in using ETFs for their ESG exposure, the research revealed a desire for more information, both about the products available on the market and the positive real-world impact of investing in ESG-themed ETFs.
The main reason given for not investing in ESG ETFs was not knowing enough about the options available to make such an investment, cited by a third (32%). This took precedence over a preference for an active approach to ESG (26%) and not being able to find an ETF which aligns to the investor’s values (19%).
When investors were asked what would most encourage them to increase their exposure to ESG ETFs, the top reason – given by 36% of respondents – was a better understanding of whether their investments were having a positive impact, outweighing even the confidence that they would deliver higher returns than other investment options (34%).
The demand and need for more information can also be inferred by respondents’ knowledge of the products available. Environment-themed products with easily understandable, clear themes were by far the most widely recognised – wind and solar strategies, for example. By contrast, ‘traditional ESG’ ETFs that employ more specialist investment terminology tended to be less well known: ‘negative screening’ was least recognisable, with only 14% of investors aware of this strategy.
“The ESG ETF market has grown and innovated to the point where these products can play an important and versatile role in investors’ portfolios, whatever their end goals”, said Sam Whitehead, Head of EMEA ETF ESG Product Management at Invesco.
“That said, there remains tremendous potential for growth in the coming years. The most popular reason we encountered for not investing in ESG ETFs was simply a self-confessed lack of understanding – in other words, a clear challenge for our industry to confront.”
Views mirror flows
The UK research is part of a wider Invesco survey of 5,500 investors across seven European markets – the UK, France, Germany, Spain, the Netherlands, Sweden and Switzerland. The report on this survey – available here – benchmarks ESG and ESG ETF adoption and reveals significant demand for sustainable passive strategies across the continent.
The demand mirrors recent activity for EMEA ETFs, where near half of all flows in the last 3 years have gone to products that integrate ESG. Such ESG ETFs now make up over 19% of the market, up from just 3% at the start of the decade.
