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.

1 https://www.morganstanley.com/ideas/sustainable-investing-funds-opportunities

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

3 Source: Morningstar as of 12/31/22.

Important Risk Considerations: There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in these portfolios. In general, equities securities’ values fluctuate in response to activities specific to a company. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Index Related Risk. The return may not track the return of the Index and therefore may not achieve its investment objective. In addition, the Portfolio can be expected to be less correlated with the return of the index. Investing primarily in responsible investments carries the risk that, under certain market conditions, the Portfolio may underperform portfolios that do not utilize a responsible investment strategy. An investment’s ESG performance, or Calvert’s assessment of such performance may change over time, which could cause the Portfolio to temporarily hold securities that do not comply with the Portfolio’s responsible investment criteria.

An ESG investment strategy limits the types and number of investment opportunities available to the strategy and, as a result, the strategy may underperform other funds that do not have an ESG focus. Companies selected for inclusion in a strategy may not exhibit positive or favorable ESG characteristics at all times and may shift into and out of favor depending on market and economic conditions.

Environmental, social and governance (ESG) criteria are a set of standards for a company's behavior used by socially conscious investors to evaluate potential investments. Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates. Governance deals with a company's leadership, executive pay and shareholder rights.

Before investing in any Calvert ETF, prospective investors should consider carefully the investment objective(s), risks, and charges and expenses. The current prospectus contains this and other information. To obtain a prospectus or summary prospectus, download a copy on calvert.com/ETFs. Read the prospectus carefully before investing.

Morgan Stanley Investment Management is the adviser to the Calvert ETFs.

Calvert ETFs are distributed by Foreside Fund Services, LLC

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