Growing appetite for socially responsible investment products is expected to help drive the future growth of ETFs in Europe, according to financial research firm Cerulli Associates.

Issuers with specialized products are likely to capture the majority of new flows into ESG ETFs in Europe.

In the firm’s latest report, European Distribution Dynamics 2020: Cross-Roads and Cross-Borders, Cerulli finds that socially responsible investing is increasingly important for clients at European private banks.

Over three-quarters (76%) of banks surveyed expect to see an increase in demand for environmental, social, and governance (ESG) funds.

More specifically, 40% anticipate significant demand for such funds from their clients over the next 12 to 24 months while 35% expect moderate demand.

Meanwhile, although asset managers have been rolling out active and passive ESG strategies in Europe over the past three years, Cerulli notes that the ESG fund market is still in its early stages. At the end of 2019, assets within ESG ETFs and mutual funds domiciled in Europe accounted for only 6% of total European AUM.

While the research suggests a significant growth opportunity, Cerulli is advising ETF issuers to create specialized and diversified offerings to differentiate themselves in an increasingly competitive market.

“In recent years, managers have focused on product innovation with the aim of broadening their ESG value propositions,” said Fabrizio Zumbo, Associate Director in Cerulli’s European Asset and Wealth Management research team. “Managers with diversified offerings in the active and passive domains, including niche and specialized exposures, will have a competitive advantage when it comes to attracting new flows.”

The firm notes that ETFs that combine ESG and thematic strategies are becoming increasingly popular with European investors. In particular, demand for thematic ESG value propositions from the wholesale channel, particularly private banks, is expected to be robust in the future.

Further supporting flows into ETFs, Cerulli finds that cost-effectiveness is becoming paramount for European investors. With European investors now using ETFs in a variety of roles including as buy-and-hold funds, tactical asset allocation vehicles, trading instruments, and low-cost portfolio building blocks, ETFs are set to benefit from a wider audience seeking diversification and new drivers of performance.