By creating a dominant suite of exchange-traded funds, BlackRock has also developed a marketplace for people willing to align their beliefs with environmental and socially responsible investing.

Competitors are now springing up, such as the startup investment fund Engine No. 1. Nevertheless, BlackRock, under the leadership of Larry Fink, remains by far the largest player in ETFs that have environmental, social and governance (ESG) characteristics. ) – through its iShares range.

Independent investment research group CFRA calculates that almost 60% of all ESG ETF assets are held by BlackRock – and 64% of net new fund flows into these funds over the past year have gone to BlackRock.

As a result, BlackRock manages seven of the 10 largest ethically-themed ETFs in the United States and the three largest such funds in Europe, according to data provider Morningstar.

“In the ESG space in particular, BlackRock has been very dominant,” says Aniket Ullal, head of ETF data and analytics at CFRA.

Although Europe has led the development of ESG products, Americans have more money invested specifically in ESG ETFs. BlackRock’s ESG Aware MSCI USA ETF alone has $24 billion in assets under management, Morningstar reports. This is more than double the largest equivalent ESG fund domiciled in Europe, which is also an iShares MSCI USA ETF.

This growth of the ESG ETF market in the United States has been largely driven by young millennial investors who manage their own accounts.

US law discourages employers from investing ESG funds in 401(k) retirement plans. But, as asset managers push the Biden administration to change that law, demand for ESG ETFs is “driven by younger investors, especially those with self-managed accounts,” Ullal says. “They want their investments to reflect certain values.”

Yet people who seek ESG funds to gain exposure to companies that reflect their values ​​will find their holdings dominated by the same few large companies. Microsoft is the most widely held stock in U.S. ESG funds, according to Bank of America, and is often the top stake in the largest such vehicles. Apple and Alphabet are often the other two tech titans vying for the top spot in these exchange-traded vehicles, according to an analysis of the biggest mutual funds in the United States and Europe.

Similarly, ESG funds will generally exclude the same types of companies: those that manufacture civilian firearms, controversial weapons or tobacco, as well as companies involved in coal or oil sands.

BlackRock has been able to win inflows for its sustainable investing products primarily because their fees are low — in most cases, comparable to the cost of owning conventional, non-ESG ETFs.

However, some competitors offer thematic funds that will do more than passively track an ESG index.

Engine No. 1, the investment fund that won three seats on the board of energy group ExxonMobil in 2021, launched its first ETF last June and now has $288 million in assets under management. Rather than excluding certain companies or rebalancing stocks, his ETF challenges companies by voting at their annual general meetings. It aims to “empower companies and management teams”. The ETF is committed to working actively with companies to drive performance.

Engine No. 1’s second ETF, which began trading earlier this year, invests in companies that aim to have net zero carbon emissions. And it’s a type of mandate that has become increasingly popular, observes Rumi Mahmood, vice president of ESG and climate funds research at MSCI, the index provider.

“One area of ​​emerging growth in particular, in Europe, is in funds aligned with explicit temperature targets,” he said. Paris-aligned ETFs, for example, will track indices in which constituent companies “are on a trajectory toward a 1.5 degree target.” [of capping man-made climate change],” he explains.

But the new Engine No. 1 ETFs stand out for their active management. These ETFs don’t just track an index, but are mandated to follow an active management process, while publishing their holdings every day. Today, enthusiasm for actively managed ETFs is combined with enthusiasm for all things ESG, says Ullal.

The popularity of ESG funds has also increased as their fees have fallen in recent years. For large asset managers such as BlackRock, the fees charged for ESG ETFs have become comparable to those of traditional equivalents. The management fee for BlackRock’s largest ESG ETF is 15 basis points. “We will continue to see fee compression,” predicts Mahmood.

One of the big questions for ETF providers going forward is whether ESG funds will become core holdings for investors, Ullal says. “Will they stop holding the S&P 500 ETF and instead hold the equivalent of the ESG ETF?” he asks.

“If they want exposure to core US equities, are they going to [also] insist on an ESG screen? If that happens, I think it will be a significant change in the US market. »