Passive providers have been busy launching environmental, social and governance (ESG) ETFs in recent months, on the back of strong investor demand helped by the availability of more historical data.
According to Morningstar, there were a total of 34 ESG-orientated passive funds on the market (as of 30 December 2016), with iShares and UBS dominating the area with eight funds each.
Since the start of the year, MSCI, Deutsche AM, Lyxor AM and most recently iShares have unveiled a variety of ESG-related passive products.
Lyxor and BlackRock pointed to growing investor demand for ESG products as the reason for launching their respective ethical bond and Japanese ESG equity ETFs, while Deutsche AM highlighted the importance of having ESG-integrated exposure available in ETF form.
Meanwhile, Ossiam, the smart-beta specialist, has started placing an ESG filter over its existing products, also citing "growing investor interest".
Antoine Moreau, deputy CEO and co-founder of Ossiam, said: "Investors interested in our existing smart-beta investment strategies have a growing interest in ESG, not least as an additional measure of quality for equities for long-term investment."
One crucial factor for the growing demand in ESG products, according to Bruno Monnier, portfolio manager and quantitative analyst at Ossiam, is investors have more historical data available on a wider range of passive ESG products as they become part of the mainstream.
Strong performance
Since its inception in September 2007, the MSCI World index has averaged returns of 3.99% per annum, only slightly outperforming the MSCI World ESG index which saw average yearly returns of 3.93% as of 28 February 2017.
Linda-Eling Lee, global head of ESG research at MSCI, pointed to "increasing evidence" that ESG strategies do not hurt performance, as a result of increasingly sophisticated data and analysis techniques.
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She said: "A growing number of industry and academic studies have shown ESG can be compatible with a variety of investment strategies. These studies have piqued investor interest and given them greater confidence to incorporate ESG analysis in their investment process and products."
She added there is "a great deal of innovation in products using ESG information", creating more options for investors.
Monnier said: "What we see in the current approach is you do not have to give up investor returns. This is why there is an increasing interest in ESG as investors have more historical returns to look at, which show no value is destroyed when using an ESG strategy.
"The consensus the market has reached is ESG is something it can work with, rather than a product which destroys value."
