Majority of ETFs planned in Europe will have an ESG slant, says PwC

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According to a new report, the majority of exchange-traded funds launching in Europe over the next year will use an environmental, social or governance slant for their construction.

Of the nearly 60 ETF providers who responded to a global survey conducted by PwC, 80% in Europe say that more than half of their products will invest with an ESG angle.

The report, which predicts that the ETF market will double globally from $10 billion today to $20 billion by 2026, concludes that European providers are feeling the pressure to invest with an inclination ESG due to investor demand and regulation.

Marie Coady, global ETF leader at PwC, said product innovation in the ETF industry was at an “all-time high”, adding that it was largely driven by investor demand for ESG.

This article was previously published by Ignite Europe, a security held by the FT group.

“People are creating more bespoke indices and tracking areas that investors really, really care about, which drives more innovation and moves ETFs away from the historical passive indices we would have seen,” she said.

Participants in Europe feel “the strongest pressure for change”, according to the report.

In Canada, 46% of suppliers say more than half of their products will have an ESG slant, while the figures for Asia and the US are significantly lower, at 38% and 28% respectively.

In Europe, however, ETF providers face regulatory challenges, including a “plethora of ESG designations and reporting requirements in different markets,” according to the report.

According to PwC, compliance with Article 8 and Article 9 of the EU Sustainable Financial Disclosure Regulation could be problematic for ETFs that fully track broad cap-weighted or thematic indices .

As in other parts of the asset management industry, the report says issuers also face challenges in obtaining reliable and consistent data and uncertainties around ESG ratings and ratings.

“There are currently implementation challenges for index ETFs with SFDR, but aligning regulations for managers with aligning regulations for index providers will certainly give ETF providers the opportunity to get the data they need for ETFs must meet their pre-contractual and periodic disclosure requirements under the SFDR,” Coady said.

She added that it would also help them with management, an area where active asset managers say they have an advantage.

“I think the same level of diligence can be done [as at an active manager] and I think when ETF managers look at building bespoke indices, they’ll be able to really layer the level of management and care that they would otherwise have in an active strategy,” Coady said.

Regulatory requirements are also expected to increase following pledges made at the United Nations climate change conference last year, PwC said.

The consultant said investor pressure could also come from elsewhere, as a key target market would be Gen Z and millennials who are increasingly using online platforms.

Other areas of the market ripe for innovation are cryptocurrency, active ETFs and theme spaces, according to the report.

Among survey respondents, 46% of providers in Europe said they would like to launch a crypto ETF in their primary geographic location if allowed, a number well above any other region.

*Ignites Europe is an information 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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Mary I. Bruner