ESG Investing Visualization on Debt and ETF

Motivation

Sustainability has been an issue for decades. ESG has become a very popular term especially last five years, which is created to measure the sustainable performance of corporates from qualitative to quantitative information. By doing this, it will enable stackholders to integrates the risks and opportunities related to environment, social, and governance into their investing decisions.

However, there are tons of difficulties ESG is facing. On the perspective of corporates, this is usually against the main purpose: gaining profit, especially for the carbon-centered industries. Though the policies are pushing the progress of climate mitigation, the issues such as greenwashing and the opponents are inevitable. This reasonably leads to the drama in the state. Many big investing companies such as BlackRock has committed to ESG investing, but many companies united and stood against them, even some states conducted anti-ESG approaches. These anti-ESG movement started mainly in 2022 and become even stronger in 2023.

By the news, it seems that ESG investment are facing strong headwinds. I’m really curious about how the situation actually is, so I decided to do some data mining and visualizing.

Goal, Data and Source

The goal of my visualization and analysis is to find out whether the headwinds against ESG investment actually influencing ESG debt and ETF amount and performance. Following are all the data I use and their source:

• ESG debts: global ESG debt data from 2007 to 2023 by country. (Bloomberg)
• GDP: GDP in USD from 2021 to 2022 by country. (IMF)
• ESG ETF: assets and flow of global ESG themed ETF. (Bloomberg)
• ETF: the price and performance of 7 selected ETFs. (Bloomberg)

ESG Debts

ESG has emerged as one of the rapidly growing sectors in the debt market, experiencing significant volume expansion since, as the left graph in Figure 1 illustrated, 2014. Over the past few years, it surged from 26 billion in 2013 to 1,934 billion in 2021. However, its momentum sharply cooled, dropping to 1,413 billion in 2023.

The right graph using a linear regrssion to show the trends of ESG debts by market segments. I categorize the global market into AMER, APAC, EMEA, and Supranational segments, where AMER stands for “North, Central, and South America”, APAC refers to “Asia–Pacific”, and EMEA means “Europe, Middle East, and Africa”. EMEA consistently dominates a significant portion. Nevertheless, it is evident that the ESG debt in AMER and EMEA has been on a decline since 2022.

Figure 1

The figure below, Figure 2, illustrates the geographical distribution of ESG debt as a percentage of GDP. Although the debt-to-GDP ratio in the United States is higher compared to Asia and most of the other countries, it is notably much lower than that of European nations. As indicated in the previous Figure 1, regions such as the United States and Europe experienced a decline in their debt-to-GDP ratios in 2022.

Figure 2

ETF

In the past few years, the assets of global ESG ETFs have consistently shown an upward trend, especially in the equity category, as evident in Figure 3. However, Figure 4 distinctly depicts a decline in capital inflows to ESG ETFs with a focus on equity, beginning in 2022, accompanied by some instances of outflows.

Figure 3

Figure 4

But ultimately, has the price of ESG ETFs been affected? In order to compare the performance, I selected seven ETFs for comparison, including:

• SUSA — iShares MSCI USA ESG Select ETF
• ESGU — iShares ESG Aware MSCI USA ETF
• ESGV — Vanguard ESG US Stock ETF
• ESGE — iShares ESG Aware MSCI EM ETF
• USSG — Xtrackers MSCI USA ESG Leaders Equity ETF
• VWO — Vanguard Emerging Markets Stock Index Fund ETF
• SPY — SPDR S&P 500 ETF Trust

The first five represent ESG-themed ETFs, while the latter two serve as representatives of the overall market.

Figure 5 compares all the mentioned ETFs, with SPY placed on the right axis due to its significantly different price scale. Upon visual inspection, it is evident that their trends are remarkably similar. ETFs such as SUSA, ESGU, ESGV, and SPY exhibit analogous patterns, while VWO and ESGE show nearly identical trajectories.

This similarity in trends may be attributed to factors other than the ESG target itself within ESG ETFs. For example, ESGE, which tracks companies in emerging markets adhering to ESG criteria, having a high correlation with VWO, an ETF investing in emerging market stocks, is not surprising.

Figure 5

In Figure 6, the performance in each period is displayed. In every period, ESGE and VWO, which exhibited similar trends previously, mostly yield negative returns. Furthermore, ESGE consistently performs worse than VWO. Therefore, despite the primary trend not being solely influenced by whether it is an ESG-themed ETF, our observation suggests that its performance during downturns is not superior to regular stocks. Intriguingly, the other ETFs outperform SPY in most cases! This suggests that ESG-themed ETFs might perform even better in favorable market conditions.

The majority of ESG-themed ETFs invest in a large number of companies, incorporating ESG screening standards to exclude targets that significantly violate sustainable criteria. Therefore, in terms of trends, the influence of other strategies within the funds is more substantial. However, as observed earlier, ESG-themed ETFs do exhibit heightened sensitivity to market conditions. Given the controversial nature of the topic, the sentiments surrounding ESG could indeed impact investment performance.

Figure 6

However, only the 3-year return of ESG-themed ETFs indicates a performance significantly lagging behind SPY. The performance in the past year (2023) did not exhibit notable weakness. We can speculate that the intensified Anti-ESG movement in 2023 did not have a substantial negative impact on ETF prices.

Conclusion

Followings are the key findings:

• Significant drop in global ESG debts since 2022, especially in EMEA and AMER region.
• Decline in capital inflows to ESG ETFs with a focus on equity, beginning in 2022.
• The ESG ETF return performance doesn’t seem related to the Anti-ESG movement.

The return on ESG themed ETF does not seems to be highly related to the anti-ESG movements .However, the anti-ESG sentiment in the United States do have had a downward impact on ESG debt issuance and the ESG ETF flows since 2022.

Forward Research Trajectories

This study has primarily focused on the analysis of ETFs and debt in the realm of ESG investing. Including data on funds would provide a more comprehensive understanding of the entire landscape of ESG investments. Furthermore, to establish a more definitive causation relationship between the Anti-ESG movement and performance outcomes, efforts should be made to mitigate the influence of other confounding factors. For instance, conducting an analysis on the correlation between ESG investment targets and ESG indexes, as well as indexes from industries like energy and technology, could offer valuable insights.

Data source: Bloomberg, IMF