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One of the more notable developments of this year has been the significant growth of sustainable (ESG) investing.

So far this year, we’ve seen $18 billion in flows going into U.S. sustainable ETFs, already more than double the $8.8 billion in flows for 2019. Perhaps most notably, during the depths of the market turmoil in February and March, when many investors were selling out of stocks and flows into equity ETFs were negative, the exception was sustainable. From February 24 to March 23, sustainable ETFs saw $1.3 billion in inflows, while the overall ETF market experienced $38billion in outflows.

Yearly flows into U.S. sustainable ETF assets ($B)

Chart: Yearly flows into U.S. sustainable ETF assets ($B)

Source: BlackRock Global Business Intelligence as of 8/31/20.

What’s driving this growth, and can it continue?

Why 2020 is a pivotal year for sustainable

As evidenced by record flows into sustainable strategies, we are seeing the early and growing signs of a shift in investor focus.

Sustainable investing was historically a values-based exercise — it has evolved into a mainstream investment risk and performance-based decision. Investors are understanding that sustainability related considerations such as climate change influence long-term returns, because they can have a significant impact on asset pricing and capital allocations.

Moreover, while investors are increasingly aware of the potential impact of climate-related risks on their portfolios, there is also more focus now on the “S” and “G” parts of ESG investing — social and governance. Companies that treat their employees well, encourage diversity, and contribute to the development of the communities where they operate in, tend to be better run companies and have the ability to recruit and retain the best talent. These companies typically have quality attributes such as strong balance sheets, stable businesses and a strong corporate governance. As a result, we believe higher ESG rated companies may add resilience to a portfolio.

In addition, we are seeing greater access to investment solutions, providing all investors with more choices when it comes to ESG investing. Investing sustainably for all but the largest investors used to be difficult given the limited number of accessible sustainable investment strategies. And rating a company’s ESG performance was proven difficult, as the data to assess companies was sparse and disparate.

Both trends are changing. As data has grown in abundance, it has led to more robust ESG indexes and an increase in availability across asset classes and strategies. And now there are sustainable funds for virtually every portfolio and objective. Since 2016, the number of sustainable ETFs has nearly doubled, from 51 to 95 (source: BlackRock as 8/30/20). At iShares, we have 26 Sustainable ETFs that offer investors a range of choices to help meet their needs and goals.

Under the hood with iShares sustainable ETFs

When it comes to ESG solutions, there are two common approaches. The first is to remove companies with controversial business activities that have elevated sustainability risks or that do not align with investors preferences. The second is to incorporate ESG research to increase your exposure to companies better suited to manage sustainability risks. In that latter approach, the investor may seek a similar risk and return as the relevant broad market or is focused on the potential return opportunities presented by companies with higher ESG scores.

ESG Screened ESG Aware ESG Advanced
Seek to eliminate exposure to areas that pose sustainability-related risks or do not align with an investor’s preferences. Balance seeking a similar risk and return to the relevant broad market with seeking a more sustainable outcome. Prioritize higher ESG-rated companies while extensively screening out controversial industries.

Our latest addition to our ESG suites are the ESG Screened ETFs, whose indexes are built off of flagship S&P indexes. These indexes are designed to remove companies with specific levels of involvement in controversial business areas by applying screens, like fossil fuel reserves and revenue from thermal coal, oil sands and shale energy, as well as tobacco and controversial weapons.1 This can help investors minimize potential risks in their portfolio, or simply avoid companies based on preferences.

The ESG Screened funds complement our existing set of funds, the ESG Aware and ESG Advanced suites. While the underlying indexes of the ESG Screened funds are designed to eliminate controversial industries, the underlying indexes of the ESG Aware funds apply ESG research to select securities that target a similar risk and return to the broad market while seeking a more sustainable outcome. The underlying indexes of the ESG Advanced funds prioritize higher rated ESG-companies, while extensively screening out controversial activities.

Summing it up

Earlier this year, we forecasted that $1 trillion would flow into sustainable indexed funds and ETFs by 2030.2 We identified four main drivers of that growth: recognition that sustainability influences risk and return; better data leading to better indexes; lower investing costs; and more choices.

The surge in flows underscores changing investor preferences and a growing conviction in companies that may be better positioned to manage sustainability-related risks. The ESG Screened funds round out the choices for investors. No matter your objective, iShares’ platform of choice is providing investors the ability to put sustainability at the core of their portfolios.

Armando Senra

Armando Senra

Head of iShares Americas at BlackRock