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ETFs for ESG: Sustainable investing is here to stay

ETFs for ESG: Sustainable investing is here to stay

Megatrend of ESG

Environmental, Social and Governance (ESG) Investing has been rapidly advancing in the last decade, with the growing concern over climate change. Sustainable investing is an area that appears to have gained greater momentum since the COVID-19 pandemic with investors now looking to invest in companies whose values and goals they identify with. In this article, we will discuss the ESG investing market trend and the performance of ESG ETFs.

ESG Investing in Pandemic

With the fact that people have been very reflective during the pandemic. They start to rethink different aspects of their lives – including their investments – line up with their values. ESG investments may be one of the answers for which they are searching.The pandemic acted as a catalyst for increased flows into ESG investments in 2020, it is expected that global action on environmental and social challenges will continue to spark flows in the coming years. Momentum will continue to build across the globe and we look forward to seeing how investors will respond to businesses and governments that hold themselves accountable to multiple sets of stakeholders, including shareholders, employees, customers, suppliers, affected communities, and local and global environments.

AUM Growth of ESG Investing

Source: GSIA, Bloomberg Intelligence[/caption]The recent momentum and capital inflow around the globe are remarkable. According to Bloomberg, the Global ESG assets are rapidly growing and estimated to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management (AUM). Assets in ESG ETFs more than doubled to $80 billion over the past year and around another 30 ESG-themed funds were launched globally according to the 2020 J.P. Morgan Global ETF Handbook.Apart from the broad market, investors at Kristal.AI also had a massive gain with ESG ETFs and they continue to explode. From Jan 2020 to Apr 2021, while the number of clients investing in ESG ETFs recorded a staggering growth of 19X, the total assets under management (AUM) have also sharply increased by 24X. ETFs such as First Trust Green Energy ETF (QCLN), Invesco Solar ETF (TAN), Invesco WilderHill Clean Energy ETF (PBW) are some of our top picks on the focus list.

Performance of ESG ETFs

#ETFExpectedReturnStandardDeviationSharpe Ratio1First Trust Green Energy ETF (QCLN)128.22%48.95%1.7382Invesco Solar ETF (TAN)140.26%53.54%1.6923Invesco WilderHill Clean Energy ETF (PBW)135.70%57.92%1.5294State Street S&P 500 ETF (SPY)26.48%22.55%1.037Source: PortfoliovisualizerThe ETF approach provides diversification across various industries, allowing investors to gain exposure without taking on the level of risk inherent in investing in a specific company. QCLN, TAN, PBW had the best 1-year trailing total returns for ESG ETFs on Kristal.AI from Jan 2020 to Apr 2021. The volatility (standard deviation) of the ESG ETFs are compensated by the enormous 3-digit expected return, implying a high risk-adjusted return (Sharpe Ratio) compared to the benchmark SPY.

ESG Trends to Watch in 2021

With this growing global urgency around climate, conversations about energy transition will become increasingly nuanced and the nature of transition conversations will shift from climate mitigation to climate resilience. Apart from the environmental concerns, social and governance issues will gain traction with investors and in global policy discussions. Below is the ESG trend to watch in 2021:

  1. Race to net-zero carbon emission
  2. Threats to Nature and Biodiversity
  3. Integrity and Diversity
  4. Corporate ESG Reporting
  5. Gender, Social, Racial Equality

Want to invest in ESG ETFs?

Get Started with Kristal.AI. Sign up or schedule a call with us if you have any inquiries, our investment professionals will get in touch with you soon.


Kristal Advisors

March 12, 2021

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