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The ESG landscape had a pivotal year and demand for ESG investments continues to grow.

According to SP Global, through December 18, 2020, the S&P 500 ESG Index returned 17.55% while the S&P 500 returned 16.24%.  One can see that the S&P 500 ESG outperformance was both in year-to-date returns and also during the March 2020 drawdown.   

Growing Investment

The ESG ecosystem continues to rapidly evolve.  According to Bloomberg Intelligence Global, ESG 2021 Outlook, ESG assets may top $53 trillion by 2025.  That is “assuming 15% growth, half the pace of the past 5 years.”

Morningstar reported in June 2020 that the number of ESG-focused index mutual funds and exchange-traded funds had grown to 534. The same report noted that most funds are based in Europe, but the United States now “represents 20%, up from 13% three years ago.”

Magnus Linder, head of derivatives at Swedbank Robur, notes in the above video that ESG has outperformed the benchmark S&P 500 both immediately before and since the pandemic hit the U.S. in March 2020. “We see that the flows into ESG are better in all market potentials,” he tells CME Group’s global head of equity index, Tim McCourt.

With so much new money flowing into this investment theme, it can be a challenge for an investor to ensure they are getting enough of the correct ESG exposure, with significant liquidity and at the right cost.  As an example, in September 2020, the S&P 500 ESG index methodology was adjusted to exclude thermal coal. Removal of this industry type was based on extensive feedback and the need for a robust index. This index has helped define the ESG derivative market.

“Climate change cemented itself as being a priority ESG issue, both for investors and also for broader society,” says Jaspreet Duhra, head of EMEA ESG Indices for S&P Dow Jones Indices, which oversaw the thermal coal consultation.  “We wanted to see if this was reflected as a sentiment of something we should be changing within our ESG index series.”

ESG Derivatives

Derivatives are quickly becoming a critical tool for ESG market participants. For Swedbank Robur, CME’s E-mini S&P 500 ESG Index futures satisfied a promise to clients to make their funds 100% sustainable. Before the contract, launched in 2019, the firm included traditional S&P 500 futures in their funds.

“We were really eager for the launch of ESG futures to give the end customers what they paid for,” says Linder.

This investor interest has resulted in a surge in trading volumes and open interest in the CME contract

In December, average daily volume broke above 1,500 and open interest doubled to over 7,000 contracts.  ESG derivatives are now a cornerstone to manage this growing investor demand.  Since the initial listing of these futures, there are now over 200 individual firms trading them, including asset managers, insurers, hedge funds and ETF issuers.

This interest is reflective of the broader trend towards ESG investment. Duhra says it’s not one she sees slowing down. “I would expect demand for ESG indices to continue to grow,” she says. “I would also expect to see an increase in the number of financial institutions looking to incorporate ESG risks for the first time.”



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