Morgan Stanley
  • Investment Management
  • Mar 23, 2023

How ETFs are Broadening Access to Sustainable Investing

More investors are turning to ETFs for ESG investments that target large-scale global challenges.

Investing for environmental, social and governance (ESG) impact is a continuing trend, as more investors prioritize issues such as global warming and social inequity in their portfolios. The vast majority of asset managers and owners (77%) reported an increase in ESG investing interest since May 2020, driven by shifting public sentiment, regulatory developments and pressures from clients and investors, according to the Morgan Stanley Institute for Sustainable Investing.1

In parallel, amid the volatile markets of the last several years, investors have also sought greater trading flexibility, lower costs and tax benefits, which have helped boost allocations to exchange-traded funds (ETFs). ETFs offer targeted market exposure without having to select individual stocks or bonds, and fees and expenses are typically lower than that of actively managed mutual funds. Investors can buy and sell shares intraday as ETFs are traded on an exchange—similar to stocks—and ETF sales generate few taxable events for ETF shareholders. ETF assets under management (AUM) have risen to $7 trillion, more than double the amount five years ago, and they are expected to reach $20 trillion by the end of the next decade.2  

Now, these two trends—toward greater interest in ESG and rising allocations in ETFs—are coming together, as a growing portion of the ETF market consists of ESG ETFs. Assets in these funds are currently $104 billion, with $77 billion being allocated in just the past three years, according to Morningstar. 

ETF Assets Projected to Reach More than $15 Trillion by End of Decade

Source: Cerulli U.S. Exchange-Traded Fund Markets 2022, published December 2022.

“There’s been rapid growth in ESG investing because investors recognize that the world faces substantial environmental and social challenges, and that companies successfully addressing these issues stand to benefit,” says John Streur, Chairman of Calvert Research and Management, which is part of Morgan Stanley Investment Management and this year reached its 40th anniversary as a market leader in responsible investing.  

In seeking sustainably focused ETFs, investors are looking for transparency: In a recent survey from the Morgan Stanley Institute for Sustainable Investing, 88% of asset owners said they want ESG reporting and disclosure, and individual investors can also benefit from these insights. “It is critical that responsible investment asset managers provide transparency into their own research methodology,” Streur says. “Investors need clarity around the linkages between corporate ESG performance, financial outcomes, security selection and the results of corporate engagement and activism.” Using a transparent ETF based on these principles can make it easier for investors to align their portfolios with their principles, he says.

A focus on greater transparency, disclosures and financial outcomes not only benefits investors – it has the potential to change behaviors that hurt the planet and society, as well as offset governments’ limitations in enacting change, according to Streur. “Strong capital market functions can advance the needs of society while providing competitive returns to investors,” he says. 

Calvert works to identify companies that advance environmental sustainability and resource efficiency; contribute to equitable societies and respect for human rights; and hold corporate leadership accountable for governance and building transparency. It is the second largest ESG mutual fund manager, with more than $30 billion in assets.3 ESG ETFs powered by Calvert aim to achieve competitive long-term performance and positive global impact.

Learn more about Calvert ESG ETFs