LONDON: Socially and environmentally conscious investing, one of finance’s newest and fastest growing sectors, is poised to get its first 1 billion-euro ($1.1 billion) credit fund, with Amundi SA and BlackRock Inc. vying to be the first ETF manager to cross that mark after a year of explosive growth.
The Amundi euro corporate SRI exchange-traded fund and BlackRock’s iShares euro corporate ESG fund are both less than 75 million euros away from the landmark. Just one year ago, neither environmental, social and governance fund had 150 million euros, based on data compiled by Bloomberg.
The skyrocketing assets reflect a wider surge in credit investors using ESG criteria, partly to support ethical policies and partly in an attempt to find a competitive edge. The Europe-centered boom is prompting more fund managers to roll out ESG credit products including Pacific Investment Management Co. and Twentyfour Asset Management.
"Flows to ESG funds are pretty much on a 45-degree angle upward, ” said Trevor Allen, a sustainability research analyst at BNP Paribas SA. "Credit is definitely lagging equity, but ESG is now a mainstream topic and it’s catching up rapidly.”
The Amundi fund tracks the 2 trillion-euro Bloomberg Barclays MSCI Euro Corporate SRI index. BlackRock’s fund is tied to a 1.65 trillion-euro Bloomberg Barclays euro corporate sustainability benchmark.
Investors are switching money from non-ESG ETFs to ESG equivalents, spurred by concerns such as climate risk, according to Vasiliki Pachatouridi, who leads fixed income strategy at BlackRock’s iShares, the world’s largest ETF operator.
"This is a multi-asset class story, not only applicable to fixed income, ” she said. "I expect the range of ESG funds to keep growing.”
Representatives at Amundi didn’t reply to requests for comment.
Even with two funds closing in on 1 billion euros, ESG remains a small corner of the credit ETF market. Europe’s largest credit ETF, the iShares core euro corporate bond fund, has almost 14 billion euros of assets.
The comparatively small size of the about 21 ESG credit exchange-traded funds worldwide may damp growth, as prospective buyers may be concerned about liquidity in funds not very widely held. Underlying indexes may also not yet be on investors’ approved lists.
"ETFs and funds need to reach a certain size and cost profile before certain types of investors will invest, ” said Andrew Craswell, who is responsible for ETF business development in Europe at Brown Brothers Harriman & Co.
The New York-based private bank also said that "stated enthusiasm” for ESG "is somewhat at odds with what we see in the market” after carrying out a survey that suggested three-quarters of investors planned to increase their ESG allocations in next year.
Still, the boom in new credit ESG products shows little signs of slowing. Pimco recently introduced an actively managed ESG credit ETF in the U.S., while Twentyfour debuted a mutual fund last week.
Demand for Twentyfour’s sustainable short-term bond fund quickly surpassed expectations, even after the company gauged potential interest from large clients during the months-long development process, according to manager Chris Bowie.
"We’ve been really astounded, ” he said. "Everyone’s hot on the topic.” - Bloomberg
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