Talking Heads – Navigating ESG investing with ETFs

This is an edited audio transcript of the Talking Heads episode Navigating ESG investing with ETFs

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing developments in the ETF market. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Daniel Dornel, Head of ETF Research. Welcome Daniel, and thanks for joining me.

Daniel Dornel: Hi, Daniel. Very happy to be here today.

DM: Daniel, if we think about how the importance of ETFs has grown over the years, we appreciate the rising importance [of ETFs] in the industry. At the same time, there’s still a lot of innovation and exciting things to see in the market. Let’s start with Europe. Can you give us an update on some of the latest trends in the European ETF market?

DD: 2025 started very much like 2024 ended in terms of flows. Market flows were dominated by US and global equities. US equities have always been an important share of ETF flows. We observed an acceleration of this trend that started in Q4 2024 in the context of Donald Trump’s election. It now looks like this trend has started fading and since the end of January, flows into US equities stopped in favour of European products. We will monitor this emerging trend very closely.

The other interesting trend concerns ESG products. In the last 18 months, we have seen ESG flows that represented just under 20% of the UCITS ETF flows, which is way below the levels in 2022 and 2023, which were between 30% to 50%. If we do a deep dive, it reveals a more complex dynamic. We observed opposite trends for different ESG approaches. Investors have switched from very selective product to less selective ones in the last 12 to 18 months.

DM: Daniel, you highlighted this change in the pattern of the flows for ESG oriented ETFs away from very selective strategies into less selective strategies. Do you have an explanation for that?

DD: We believe this has to do with the impact of how you integrate ESG in index and portfolio constructions.

If we take the example of our MSCI Socially Responsible product range, these are the most selective products we have in our ETF range. They embed extensive controversial business exclusions such as controversial weapons, tobacco, alcohol, gambling and so on. They select only the top-25% stocks based on ESU ratings. Such selectivity implies that those indices are more likely to deviate from traditional exposures from a performance point of view.

This has been the case in the last couple of years. For example, in 2022, we have seen an outstanding performance of the energy sector, which is mostly excluded from SRI indices because of the exclusions of fossil fuel and coal-related companies. More recently, the Magnificent-7 – a group of leading mega-cap tech stocks –have been a key driver of performance for large cap exposures and the impact of missing one of those stocks in your portfolio can be high.

We believe this led investor to review the way they look at EG and how they implement it in their portfolio, focusing on less selective ESG approaches which tend to deviate less from traditional indices.

However, those less selective approaches still aim at improving the ESG profile.

They improve the portfolio average ESG score and reduce carbon intensity. These strategies remain quite ambitious from an ESG standpoint, but offer more comfort to investors.

DM: Another interesting development are active ETFs. We’ve heard a lot about them recently. How does that fit into your ESG integration story?

DD: So We have seen in Europe in 2024 a record year, especially for equity products with over 13 billion euro in inflows. And this trend seems to continue in 2025.

At BNP Paribas Asset Management, we believe active ETFs can be an efficient way of integrating ESG in a portfolio.

We launched last year a range of active ETFs called ESG enhanced.
The idea here is not to have an active product to generate outperformance, but to be active from an ESG point of view.

To do so, we developed a methodology which aims at delivering similar exposure to mainstream indices while leveraging on our own sustainability expertise. These products have important ESG considerations while limiting as much as we can the deviation compared to standard exposures. The need from investors for ESG integration with a more controlled deviation from the market is clear.

DM: Finally, Daniel, are there any other types of ESG strategies?

DD: Yes, of course. We have ESG versions of the traditional stock market indices such as the S&P 500 or the CAC 40. These products are not the most selective ones and neither the less selective ones.

They have been quite successful with investors, especially in the case of the S&P 500 ESG that has recently been renamed the S&P 500 Scored and Screened.

Finally, we have sustainable thematic products. Here the philosophy is completely different. For all the previous products, the idea was to start from a standard index, add ESG considerations with filters, ESG scores and carbon intensity improvement. Here, the idea is to target companies based on their exposure to the specific theme by looking, for example, at the portion of the revenue which can be linked to it.

The indices tend to be more concentrated and they have no constraints against the standard indices. At BNP Paribas Asset Management, we have an extensive offering of such products with themes such as circular economy, biodiversity, blue economy or hydrogen, which are among the main area of focus of investors for sustainable thematic products these days.

They have been quite successful with investors.

DM: Daniel, if I can summarise some of the really interesting points that you shared with us.

You talked about how there has been a decline in some of the flows going to ESG ETFs, but there’s much more variation if you look underneath the hood.

And the trend that you’ve noticed is that flows seem to be going away from very selective strategies towards less selective strategies. You also highlighted that when you think about active ETFs, the active management comes in the implementation of ESG criteria rather than just trying to outperform the benchmark. Well, Daniel, thank you very much for joining me.

DD: It was a pleasure.