François Millet (Lyxor): The trend to shift portfolios towards responsible investing will gather pace
Against all odds, ESG ETFs have continued to attract funds since the beginning of the year, going against the tide of other asset classes. For François Millet, Lyxor Head of ETF Strategy, ESG & Innovation, this phenomenon should even increase in the future, with the health crisis acting as a catalyst.
Investment in responsible ETFS have shown a certain resilience despite the crisis…
Indeed, net inflows into ESG ETFs have remained positive since the start of the year. They were approaching EUR 6.9 billion by late March, when the European ETF market as a whole recorded outflows of EUR 10.8 billion over the same period (which represents a very harsh reversal after the record inflows of 2019 and the beginning of this year). While we felt that in theory it was logical that investments in ESG products should prove resilient, we were still surprised by the size of the disparity between these two figures.
How can this phenomenon be explained?
Investors who urgently sought to cut their overall exposure to the markets did so by divesting from the simplest and most liquid strategies on the large generalist indices (primarily on American equities), rather than by unravelling carefully thought-out investment strategies, as is the case with ESG. Similarly, ESG strategies do not respond to short-term tactical allocation patterns but tend to be lodged in the stable components of portfolios. These investments have consequently been maintained.
"Historic performances were already demonstrating that ESG strategies are long-term winners. The present crisis illustrates that they also tend to be resilient in the short-term."
The performance of ESG ETFS has also proved resilient. What are the factors that justify this?
Historic performances were already demonstrating that ESG strategies are long-term winners. The present crisis illustrates that they also tend to be resilient in the short-term: our European equity strategies outperformed by between 1.8% and 2.8% in March. There are several reasons for this. Firstly, they display style biases towards large caps, towards so-called ‘quality’ companies (distinguished by the strength of their balance sheet) and towards lower volatility securities, three factors serving as support when the markets are in upheaval. In recent weeks, they have also benefited from their sector bias, as the price of oil has collapsed. Energy and more specifically oil stocks are underweighted in ESG portfolios.
So the ESG ETF market looks set for a bright future…
Even though the inflows into ESG ETFs have held up well, assets under management in this segment are still low, in the region of 4% of the total ETF market. But we believe that this proportion is bound to grow significantly. Many investors were already giving some thought to putting ESG strategies in place, but had not yet taken the plunge. Since the current crisis has caused them to cut their positions in more traditional products, as demonstrated by the outflows, we consider that they will reallocate their cash into ESG products when they return to the markets.
We are therefore expecting major movements of capital, and all the more so as new investment vehicles are coming onto the market, especially in the field of ecological and energy transition. On the subject, we would like to announce that Lyxor has just launched a range of four ‘climate’ ETFs, the first of their kind in Europe, to support climate transition.
Could it be said that the current crisis will generally strengthen the movie into responsible investment?
The health crisis exhibits certain similarities with climate issues, including the fact that for too long we have ignored how dependent our economic and social systems are on natural factors.
In this respect, what is happening at the moment argues for progressing even further in responsible investment practices. In particular, this will include attaching greater importance to long-term views, rather than to short-term considerations, and a stronger commitment to climate transition. We are convinced that asset managers can be true drivers of this transition, by combining innovation in investment vehicles, proactive dialogue with companies, and a tougher voting policy on environmental issues in general shareholders' meetings.