How much money is invested in ESG ETFs?
Not as much as you think, but it's been growing fast
TLDR: The growth rate in ESG ETFs has been W-I-L-D. In 2021, ESG assets constitute 3.6% of total ETF assets in 2021, and could grow to 5-10% of total ETF assets by 2025
Have you ever wondered how much money is invested in ESG globally?
Let’s start with the ETF market. This is the result from a quick Google search:
Given the amount of ETF assets in the world stood at $10 trillion in 2021, this represents a puny 3.6% of total ETF assets. The hype around ESG seems overblown!
Looking deeper, however, this came off an impressive growth rate. Back in 2006, ESG ETFs only amassed $5 billion of assets. This translates to a ~33% annual growth rate over 15 years. Truly impressive.
And according to this Bloomberg Intelligence report, if this growth rate were to continue, ESG ETFs could reach $1.3 trillion in 2025. Assuming a flat annual growth rate of 5% for total ETF assets, that means in 2025, ESG assets would grow to represent over 10% of total ETF assets.
You may argue that the growth rate for total ETF assets is higher or lower, but for the sake of discussion, let’s say that a 10% share is a reasonable rounded amount.
For context, this means that in 2025, one out of every ten dollars that gets invested into passive tracker funds has an ‘ESG consideration’. Is that a lot? Depending on which camp you are in, it might be too much or too little.
Where might that growth be coming from? From the same Bloomberg Intelligence report:
Though Europe dominated ESG ETFs so far, the U.S. have led the wave of expansion.
One may wonder, however, if ESG ETFs could sustain this strong growth rate until 2025, especially when the wave of expansion is supposed to come from the U.S., where we see headlines like this:
Suppose this ‘woke capitalism’ backlash also happens in Europe, the 33% growth rate may seem a tad too ambitious. And assuming that 50% of the growth would continue to come from Europe, with the U.S. contributing maybe 30-40% of the growth, the rest of the growth would have to come from Asia-Pacific.
What is the state of ESG ETFs in Asia-Pacific? From an FT report citing Cerulli Associates:
Total ESG ETF assets under management in the countries covered by the Cerulli research — Australia, China, Taiwan, Japan, Korea, Hong Kong, Indonesia, Malaysia, India and Singapore — grew from $308.7m in 2016 to $12.8bn as of June 2021.
Again, explosive growth. We are looking at a compounded annual growth rate of 111%! Of course, the low-base effect is worth noting in Asia-Pacific. At $12.8 billion, this constitutes only 3.5% of the $360 billion of global ESG ETFs.
With some generous assumptions and rounding, assuming the regions mentioned above grew at half the current growth rate1:
2021 ($360 billion): Europe $180 bn + U.S. $165 bn + Asia Pac $15 bn
2025 ($730 billion): Europe $340bn + U.S. $315bn + Asia Pac $75 bn
At $730 billion, this is roughly half of the original Bloomberg forecast, which you may look at as a base case (or even bear case) for ESG ETF growth. But even in this scenario, we are talking about ESG ETFs doubling from 2021 level, which is significant.
Under this scenario, ESG assets constitute roughly 5% of total ETF assets, and what is notable is that Asia Pacific will become an increasingly important region in this space. Of course, this is a very rough back-of-the-envelope calculation, and incorporates some generous assumptions.
Also, as the saying goes: all models are wrong (but some are useful!). If this exercise accomplishes anything, it’s that if someone tells you ESG ETFs constitute a quarter or half of the world’s ETF market, you know that is outrageous. Even with such explosive growth rate, we may only be looking at 10% in 2025.
Going back to the current state, if we look at the list of the six biggest ESG ETFs compiled by the Motley Fool, it is not hard to see they are mostly U.S. and Europe focused.
A quick look at their methodology revealed that most use a simple exclusionary approach, and even the biggest ETF does not have an AAA rating by MSCI, so this may also lead to questions about how ‘pure’ these ESG ETFs truly are.
In the next part, we will look at the active fund management space and debt issuance market, where ESG assets have a bigger overall share compared to the ETF market.
Europe and the U.S. grow at 17.5% (35% divided by 2), and Asia Pacific grows at 50%