Green
Visualizing the Sustainable ETF Universe
Visualizing the Sustainable ETF Universe
Globally, sustainable exchange-traded fund (ETF) assets hit $150 billion last year, vaulting 25 times higher than in 2015.
Yet despite this growth, sustainable ETFs—baskets of investments that focus on environmental, social and governance issues—account for roughly 5% of the entire ETF universe. What makes up this rapidly growing market? Where are the most common areas for investment?
To answer this question, this infographic from MSCI breaks down the sustainable ETF universe.
Sustainable ETFs: An Overview
By and large, the scope of sustainable ETFs can vary. One sustainable ETF may consist of clean tech companies, and another could focus on sustainable leaders in the S&P 500. Like the broader ETF market, they typically offer low fees.
Overall, the sustainable ETF universe can be broken down into four types of assets.
| ETF Asset Class | Global Number of ETFs | Share of Total |
|---|---|---|
| Equity | 331 | 80.7% |
| Bond | 69 | 16.8% |
| Mixed Assets | 8 | 2.0% |
| Alternative | 2 | 0.5% |
As of Dec. 31, 2020
Source: MSCI LLC ESG Research (Feb, 2021)
Unsurprisingly, the majority of sustainable ETFs are equity ETFs, comprising 81% of the market as of Dec. 31, 2020.
Following equity ETFs are bond ETFs, at nearly 17% of the total universe. One growing subset, known as green bonds, are typically used to fund environmental projects such as water management and green buildings. Here, debt issuers generate fixed income for investors that target climate objectives.
Meanwhile, there are just eight funds globally, or about 2% of sustainable ETFs, that combine more than one type of asset. Alternative ETFs, which are assets outside of stocks and bonds, are the smallest part of the universe at 0.5%.
Sustainable ETFs by Approach
Next, let’s take a look at different sustainable investing styles. Generally speaking, there are four main approaches: integration, values & screening, thematic, and impact.
| ESG ETF by Type | Share of Total | Europe | North America | Asia | Australia |
|---|---|---|---|---|---|
| Integration | 40.5% | 30.8% | 50.1% | 57.7% | 28.6% |
| Values & screening | 43.9% | 60.6% | 22.5% | 34.6% | 71.4% |
| Thematic | 12.9% | 8.7% | 20.7% | 3.8% | 0.0% |
| Impact | 2.6% | 0.0% | 5.9% | 3.8% | 0.0% |
As of Dec. 31, 2020
Source: MSCI LLC ESG Research (Feb, 2021)
Integration approaches, which make up 41% of the universe, are when investors use ESG factors to identify risks and opportunities that may enhance long-term performance. A best-in-class method, which invests in leaders in a given sector, is one form of an ESG integration approach.
In the U.S., the 24 largest equity ETFs following this approach hold roughly $25 billion in assets.
At the lower end of the spectrum, 3% of all sustainable ETFs follow impact approaches, which cover investments that provide solutions to environmental and social issues. Investments that fall under this approach may have frameworks that target the UN Sustainable Development Goals.
Sustainable ETFs by Domicile
Where are the biggest markets for launching sustainable ETFs?
When it comes to the prevalence of sustainable ETFs around the world, Europe leads the way. With over half of all sustainable ETFs, Europe surpasses North America by a significant margin. Of the 40 ETFs with over $1 billion in assets, 26 are domiciled in Europe.
| ETF by Domicile | Number of ETFs | Share of Total |
|---|---|---|
| Europe | 208 | 50.7% |
| North America | 161 | 39.3% |
| Asia | 25 | 6.1% |
| Australia | 14 | 3.4% |
| Other | 2 | 0.5% |
As of Dec. 31, 2020
Source: MSCI LLC ESG Research (Feb, 2021)
Despite covering about 6% of the total number of ESG ETFs, interest in sustainability investing is strong in Asia. Notably, one study found that 79% of institutional investors in Asia-Pacific “significantly” or “moderately” increased investment in ESG-linked assets.
Understanding the Carbon Intensity of Sustainable ETFs
Finally, let’s examine how the carbon intensity of sustainable ETFs breaks down. Carbon intensity measures the amount of carbon dioxide equivalent emitted relative to a company’s revenue.
| ETF Carbon Intensity | Share of Total | Average Carbon Intensity, Tons of CO2 Equivalent/USD Million Sales |
|---|---|---|
| Very Low | 5.7% | 0 to <15 |
| Low | 18.4% | 15 to <70 |
| Moderate | 50.1% | 70 to <250 |
| High | 18.4% | 250 to <525 |
| Very High | 7.4% | 525 to <2000 |
As of Dec. 31, 2020
Source: MSCI LLC ESG Research (Feb, 2021)
The carbon intensity of the average company varies significantly across sectors.
Interestingly, under 6% of sustainable ETFs exhibited the lowest carbon intensity levels of 0 to 15 weighted average tons of CO2 equivalent (WACI). Among the lowest carbon-intensive ETFs was one with a greater focus on banking, insurance and financials.
By contrast, sustainable ETFs with the highest carbon intensity levels accounted for over 7% of the total universe, with these funds holding higher shares of mining and utilities companies.
Across all sustainable ETFs, 58% fell within the moderate range of 70 to 250 WACI.
At the Crossroads
Sustainable investing may be one of the most critical movements over the last decade for the financial industry.
But at the same time, greenwashing concerns are rising. To offset this trend, the European Union has set in place new rules on what constitutes a sustainable fund. Here, investments will essentially be labeled as sustainable or not. This could become a global standard.
For investors who wish to invest in sustainable ETFs, the importance of research and data providers will play a more concrete role, especially as the universe continues to expand.
Agriculture
Here’s Why the Amazon is So Important for Global Food Security
The Amazon rainforest plays a critical role in supporting crop growth by stabilizing the climate and balancing water cycles.
Why is the Amazon Rainforest Important for Food Security?
The Amazon rainforest is home to 400 billion trees and covers 6.7 million square kilometers, but the ‘Earth’s lungs’, as it is commonly referred to, is so much more than that.
Aside from being a key carbon sink, it also plays a critical role in supporting crop growth by stabilizing the climate and balancing water cycles.
In this infographic, our sponsor Brazil Potash looks at how the Amazon regulates rainfall and temperature and how crop yields can be optimized. Let’s dive in.
Rainfall as a Primary Water Source
“Flying rivers” are air currents that carry enormous amounts of water vapor over thousands of kilometers. These airborne rivers are responsible for influencing regional and global weather patterns, including rainfall.
The Amazon flying river cycle begins with water evaporating from the Atlantic Ocean. Wind currents then transport these vapors across the continent, exchanging moisture with the Amazon rainforest through evapotranspiration. Finally, these aerial rivers distribute the moisture as rain.
The trees in the Amazon rainforest release around 20 billion tonnes of water into the atmosphere daily—this is more water than the Mississippi River discharges in 13 months.
Because only around 6% of cropland in Brazil is irrigated, the region relies heavily on this rainfall as a primary water source to support crop growth that feeds both local and global communities.
Temperature Regulation
The Amazon also absorbs billions of tons of carbon dioxide (CO2) a year through photosynthesis. By absorbing this CO2, it helps regulate temperatures and lessen the effects of climate change.
According to NASA research, the cumulative effects of climate change, accelerated by deforestation, may result in the loss of up to 11 million hectares of agricultural land in Brazil by the 2030s.
The continued sustainable production of Brazil’s crops is essential to food security, but deforestation can harm these efforts.
How to Grow More With Less
Brazil hosts the largest section of the Amazon rainforest at around 60%. The country is also one of the world’s largest exporters of agricultural goods.
It’s essential for global food security and for climate change that crop yields in Brazil are increased in areas already allocated for agriculture, instead of clearing new areas in the Amazon rainforest.
A recent study highlights a significant yield gap in Brazil’s primary export, soybeans.
A yield gap is the difference between actual crop yield and potential crop yield.
| Region | Yield | Yield Gap |
|---|---|---|
| Cerrado | 62% | 38% |
| Amazon | 69% | 31% |
| Atlantic Forest | 76% | 24% |
| Pampa | 92% | 8% |
The following steps proposed could optimize land usage:
- Increase crop yields: This can be done in part by optimizing and increasing fertilizer use. Local fertilizer suppliers are essential to this by providing affordable and accessible fertilizer year-round.
- Double Crop: Continuing to grow a second crop of corn on soybean fields between seasons to optimize land usage. Additional fertilizer is essential to maintain the soil’s nutrients after harvests.
- Raise cattle on smaller pastures: By streamlining the space provided for cattle, additional cropland can be added to support food for both people and livestock.
The Role of Brazil Potash
Brazil Potash aims to support the preservation of the Amazon rainforest by working with farmers to increase crop yields and improve the quality and quantity of food grown, without the need for land expansion.
By keeping farmers informed of fertilizer’s benefits and supporting a more stable supply of local fertilizer, Brazil Potash will continue supporting farming communities for generations to come.
Click here to learn more about sustainable crop growth in the Amazon and Brazil Potash.
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