Michael Peters, deputy chief executive of Eurex, said the debut of three futures based on environmental, social and governance indices is the start of a new asset class for Deutsche Börse’s derivatives arm

On 18 February Eurex launched three ESG contracts which it said were the first European futures on ESG benchmark index. They are based on three  highly liquid European STOXX covering ESG exclusions, low carbon and climate impact.

Driving #ESGinvesting: we have teamed up with @STOXX to innovate the market for #ESG investments. Today, we have launched three ESG #Futures based on #STOXX benchmarks, thus supporting investors who focus on #sustainability. #ESGDerivatives https://t.co/szSp1RyyZf pic.twitter.com/BeBRLFTXLw

— Eurex (@EurexGroup) February 18, 2019

Peters told Markets Media: “We see the launch of ESG futures as the start of a new index family and the creation of a new asset class, as we did ten years ago with the launch of dividend related derivatives.”

He added that historical ESG investment focus has been on the environment but has widened, so Eurex has also chosen a low carbon index and an index excluding controversial weapons and tobacco as underlyings for the futures.

“ESG futures listed in the Nordics have been successful but they are mostly considered as a regional product. STOXX indices are European benchmarks with a strong footprint within the buy side community,” said Peters. “The underlying ESG indices for the Eurex futures are highly correlated to the EURO STOXX 50 and EURO STOXX 600 indices, hence the listed ESG futures have the potential to become European benchmarks in the ESG space.”

The start of trading was encouraging with more than 300 trades on the first day but it will take time to build a critical mass of liquidity and open interest according to Peters. He explained that ESG futures should be highly relevant for the buy side by contributing to performance as well as mitigating unwanted sustainable risks. Asset managers will be able to use the futures to create synthetic positions or to hedge their assets under management in the ESG space.

“Given the growth of ESG assets under management, we are very confident in the growth of the necessary liquidity,” Peters added. “The trend in ESG investing has developed from the niche to the mainstream.”

ETFs

Peters added that the launch of ESG futures support asset managers include ESG related exchange-traded funds into their portfolios.

He said: “Large ETF issuers indicated strong demand to use the respective ESG STOXX indices to issue ESG related ETFs.”

Last year total assets invested in ESG ETFs and ETPs listed globally rose by nearly one third, 29.51%, to $22.5bn (€20bn) according to ETFGI, an independent research and consultancy firm. Last year ESG classified products attracted $7.61bn in net new assets.

Passive funds represented more than a quarter of the total inflows into European sustainable funds last year at €9.1bn, up from €8.8bn in 2017, according to Morningstar. The data provider’s report, European Sustainable Funds: 2018 in Review, said index funds and ETFs with an ESG mandate or theme represent 11.2% of the European sustainable fund market, up from 6.4% five years ago.

Overall the European sustainable fund market saw net flows of €34.4bn last year, down from €57.9bn in 2017. Morningstar said in the report: “The 40% decline in new money was however smaller than the 80% slump suffered by the overall European fund universe.”

Despite positive flows, assets under management in European sustainable funds fell by 1.3% to €684bn at the end of 2018. However, the research found that sustainable funds performed well last year relative to peers.

“The returns of 32% of sustainable funds landed in the top quartile of their respective Morningstar Categories, and 62% finished in the top half,” added the report.

US sustainable investing

A majority of U.S. asset managers are now practicing sustainable investing according to a new survey from the Morgan Stanley Institute for Sustainable Investing and Bloomberg. Almost all, 82%, of fund managers think companies with strong ESG practices may be better long-term investments and nearly two-thirds, 62%, believe it is possible to maximize financial returns while investing sustainably.

Since 2012, there has been a 220% rise in assets managed with sustainable investing criteria. Our survey of US asset managers conducted with @Bloomberg dives further into the trend of #sustainableinvesting and its possible future growth. https://t.co/xlbIvbNVHg pic.twitter.com/DIIne2CbO5

— Morgan Stanley (@MorganStanley) February 22, 2019

Three quarters of respondents reported that their firms have adopted sustainable investing, up from 65% in 2016, according to the report, Sustainable Signals: Growth and Opportunity in Asset Management.

Matthew Slovik, head of global sustainable finance at Morgan Stanley, said in a statement: “The survey results demonstrate that sustainable investment strategies are now a strategic imperative. It is clear that asset managers will continue to invest new resources and expand their product portfolios in the coming years.”

Seven in ten asset managers said that the industry lacks standard metrics to measure non-financial performance of sustainable investments. “The field is wide open for better data and the development of impact measurement tools,” said the report.

Almost all the respondents, 89%, also said sustainable is here to stay and 63% expect it to continue to grow in the next five years.