ESG ETF inflows in the first quarter hit a record $54 billion equivalent to 60% of total flows last year putting the sector on course to double this year, a new report published by Bloomberg Intelligence (BI) says.

The adoption of the EU’s new taxonomy rules on green investments provides an opportunity for managers to develop climate products with new launches already from UBS, BlackRock and Amundi, the report notes.

However, the surge of funds into clean energy could increase the overall volatility of ESG investing as clean energy ETFs are more cyclical and experienced big declines in 2020 during the downturn

“Asset managers will have to compete harder in the expanding ESG ETF market. Funds that offer unique strategies at minimal cost are likely to draw the most interest while flows to complex themes tend to be cyclical,” said BI ESG Analyst Shaheen Contractor.

Thematic ESG and sustainability funds, BI say focusing on simpler concepts such as low carbon or fossil free tend to be cheaper to manage than ones focused on issues such as sustainable development while complex funds tend to have higher fees and fess are likely to be squeezed by increased competition, BI says.

The BI report, ESG and Values Based ETF Flow Tracker, notes that clean energy ETF flows were around 40% of total ESG flows in January before slipping back to 10% in February. Flows tend to follow performance and clean energy goes through cycles which could hit ESG ETFs as a whole.

North America is narrowing the gap with Europe on flows and launches although Europe still leads thanks partly to a range of ETFs focused on climate change, the report adds.

Source: Bloomberg Intelligence