Top ESG funds aren’t the same, but there are common threads

Active and passive, old and young, European and U.S.-based – top 20 global ESG equity funds run the gamut in analysis

Top ESG funds aren’t the same, but there are common threads

Though they’re all placed under the same principles-based umbrella, ESG funds are notoriously diverse. And you don’t even have to look at that many to really see that.

In a recent blog post, Rumi Mahmood, senior associate at MSCI Research shared the results of an analysis focusing on the 20 largest equity ESG funds in MSCI’s global ESG coverage.

“The 20 largest ESG funds that we track held more than USD 150 billion in assets combined, as of Dec. 31, 2020,” Mahmood said. “Collectively, these 20 funds represent approximately 13% of the total assets under management (AUM) globally in ESG equity funds in our coverage universe.”

Mahmood noted wide variations in the investment approaches and holdings of the ESG funds. While active funds accounted for a slight majority of assets held, with the passive portion of AUM split evenly between mutual funds and ETFs.

The funds also differed widely in tenure, as the oldest fund was more than 30 years old while the youngest one was just over five. Through an asset lens, two thirds of total AUM (over US$100 billion, was held in funds that hadn’t hit their 20th birthday, with half being domiciled in Europe, an early adopter of ESG.

“The geographic market focus of most funds was U.S. equities, however,” Mahmood said.

From a sector perspective, information technology represented the largest allocation in most funds, while energy got a nearly zero allocation. That bias, he said, was a major contributor to the recent short-term outperformance of many ESG funds compared to their non-ESG peers, particularly as tech stocks rallied while energy faltered in 2020.

The most commonly held stock was Google parent Alphabet, which was present in 12 funds and had an average weight of 1.9%, and Microsoft was among the top found most common holdings. Apple and Microsoft had the highest average weights at 5.6% and 5%, respectively.

“Despite the general absence of energy exposure in our 20 largest ESG funds, some (especially ETFs) did have minor allocations to energy stocks,” Mahmood said, noting the diversifying impact of index methodology.

Most of the funds analyzed that had no energy exposure were actively managed, and the majority of those that did were index-based. Since the energy sector ends to score poorly on ESG issues, Mahmood said funds with energy exposure run a greater risk of holding pollutive companies or those with higher-carbon intensity.

“Holdings alone do not provide the full picture, however; in fact, there were funds that did not have any energy stocks but exhibited a substantially higher carbon intensity than those that did,” he said.

“They highlight the fact that there is no one way to invest sustainably, as well as demonstrate clearly that different investors may be at different stages in their ESG journey and that their preferences can be quite diverse,” said  Mahmood. “A solid understanding of fund ESG policies can be essential in helping investors make the most of their fund decisions.”


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