Some ESG Funds Are Not Like the Others

Blog post
8 min read
Rumi Mahmood
April 19, 2021
  • ESG funds' holdings can vary significantly, depending on their objectives, methodologies and geographic exposures. We examined the 20 largest ESG equity funds in our coverage universe.
  • Information technology was the largest sector allocation for most of these funds, with almost no allocation to energy. Alphabet Inc. was the most commonly held stock, with an average weight of 1.9%.
  • Despite the overall low allocation to energy, 11 funds both held energy stocks and exhibited a lower carbon intensity than those with no energy exposure.
Investors looking to better align their equity allocations with their overarching investment values will not be surprised to learn that not all ESG funds are the same, and in fact can vary significantly. What did we find when we examined the 20 largest equity ESG funds in our global ESG coverage, focusing on their holdings and their ESG attributes and any other consideration that investors might find important when conducting their ESG-fund due diligence and selection?1
20 Largest ESG Funds Varied by Approach, Age and Domicile
The 20 largest ESG funds that we track held more than USD 150 billion in assets combined, as of Dec. 31, 2020. Collectively, these 20 funds represent approximately 13% of the total assets under management (AUM) globally in ESG equity funds in our coverage universe. Despite their nominal similarities, these ESG funds varied widely in their investment approaches and holdings. Actively managed funds accounted for a slight majority of held assets, holding over 50% of total AUM, while the remaining AUM held by index-based funds were divided evenly between mutual funds and ETFs. The funds varied widely in tenure and domicile, while the oldest fund is more than 30 years old and the youngest just over five. But two-thirds of total AUM (over USD 100 billion) was held in funds less than 20 years old, and half of them were domiciled in Europe, where ESG adoption has been long established. The geographic market focus of most funds was U.S. equities, however. (See the exhibit below for detail.)
How the 20 Largest ESG Equity Funds Break Down

#

Name

AUM USD Billion

Inception

Domicile

Geographic Focus

Fund Type

MSCI ESG Rating

Peer Percentile Rank

1

Parnassus Core Equity Fund

22.94

1992

U.S.

U.S.

Active Mutual Fund

A

83rd

2

iShares ESG Aware MSCI USA ETF

13.03

2016

U.S.

U.S.

ETF

A

82nd

3

Vanguard FTSE Social Index Fund

10.87

2000

U.S.

U.S.

Index Fund

BBB

41st

4

Stewart Investors Asia Pacific Leaders Sustainability Fund

9.87

2003

U.K.

Pacific ex Japan

Active Mutual Fund

A

61st

5

Vontobel Fund - mtx Sustainable Emerging Markets Leaders

9.58

2011

Luxembourg

Emerging Markets

Active Mutual Fund

A

81st

6

Northern Trust World Custom ESG Equity Index

8.69

2013

Ireland

Global

Index Fund

A

35th

7

Pictet - Global Environmental Opportunities

8.31

2010

Luxembourg

Global

Active Mutual Fund

AA

89th

8

Pictet - Water

8.02

2000

Luxembourg

Global

Active Mutual Fund

AA

-

9

KLP AksjeGlobal Indeks I

7.69

2004

Norway

Global

Index Fund

A

31st

10

Nordea 1 - Global Climate and Environment

7.37

2008

Luxembourg

Global

Active Mutual Fund

AA

89th

11

Parnassus Mid-Cap Fund

6.90

2005

U.S.

U.S.

Active Mutual Fund

A

98th

12

iShares ESG Aware MSCI EM ETF

6.83

2016

U.S.

Emerging Markets

ETF

A

98th

13

iShares Global Clean Energy UCITS ETF

6.52

2007

Ireland

Global

ETF

A

45th

14

iShares Global Clean Energy ETF

6.51

2008

U.S.

Global

ETF

A

45th

15

Nordea 1 - Emerging Stars Equity Fund

6.41

2011

Luxembourg

Emerging Markets

Active Mutual Fund

A

87th

16

TIAA-CREF Social Choice Equity Fund

6.32

1999

U.S.

U.S.

Index Fund

A

86th

17

Handelsbanken Hallbar Energi

5.85

2014

Sweden

Global

Active Mutual Fund

A

77th

18

Putnam Sustainable Leaders Fund

5.81

1990

U.S.

U.S.

Active Mutual Fund

A

92nd

19

iShares MSCI USA SRI UCITS ETF

5.63

2016

Ireland

U.S.

ETF

AA

99th

20

Calvert Equity Fund

5.37

1987

U.S.

U.S.

Active Mutual Fund

A

95th

#
Name
AUM USD Billion
Inception
Domicile
Geographic Focus
Fund Type
MSCI ESG Rating
Peer Percentile Rank
1
Parnassus Core Equity Fund
22.94
1992
U.S.
U.S.
Active Mutual Fund
A
83rd
2
iShares ESG Aware MSCI USA ETF
13.03
2016
U.S.
U.S.
ETF
A
82nd
3
Vanguard FTSE Social Index Fund
10.87
2000
U.S.
U.S.
Index Fund
BBB
41st
4
Stewart Investors Asia Pacific Leaders Sustainability Fund
9.87
2003
U.K.
Pacific ex Japan
Active Mutual Fund
A
61st
5
Vontobel Fund - mtx Sustainable Emerging Markets Leaders
9.58
2011
Luxembourg
Emerging Markets
Active Mutual Fund
A
81st
6
Northern Trust World Custom ESG Equity Index
8.69
2013
Ireland
Global
Index Fund
A
35th
7
Pictet - Global Environmental Opportunities
8.31
2010
Luxembourg
Global
Active Mutual Fund
AA
89th
8
Pictet - Water
8.02
2000
Luxembourg
Global
Active Mutual Fund
AA
-
9
KLP AksjeGlobal Indeks I
7.69
2004
Norway
Global
Index Fund
A
31st
10
Nordea 1 - Global Climate and Environment
7.37
2008
Luxembourg
Global
Active Mutual Fund
AA
89th
11
Parnassus Mid-Cap Fund
6.90
2005
U.S.
U.S.
Active Mutual Fund
A
98th
12
iShares ESG Aware MSCI EM ETF
6.83
2016
U.S.
Emerging Markets
ETF
A
98th
13
iShares Global Clean Energy UCITS ETF
6.52
2007
Ireland
Global
ETF
A
45th
14
iShares Global Clean Energy ETF
6.51
2008
U.S.
Global
ETF
A
45th
15
Nordea 1 - Emerging Stars Equity Fund
6.41
2011
Luxembourg
Emerging Markets
Active Mutual Fund
A
87th
16
TIAA-CREF Social Choice Equity Fund
6.32
1999
U.S.
U.S.
Index Fund
A
86th
17
Handelsbanken Hallbar Energi
5.85
2014
Sweden
Global
Active Mutual Fund
A
77th
18
Putnam Sustainable Leaders Fund
5.81
1990
U.S.
U.S.
Active Mutual Fund
A
92nd
19
iShares MSCI USA SRI UCITS ETF
5.63
2016
Ireland
U.S.
ETF
AA
99th
20
Calvert Equity Fund
5.37
1987
U.S.
U.S.
Active Mutual Fund
A
95th
The right-hand column shows the percentile rank of the fund within its peer group and within the global universe of funds in the MSCI coverage universe. Data as of Dec. 31, 2020. Source: Broadridge, MSCI ESG Research
Sector Exposure and Positioning
Information technology was the largest allocation in most funds, with an almost zero allocation to energy (see exhibit below). This sector-based exposure was one of the key drivers behind the recent short-term outperformance of many ESG funds relative to their non-ESG counterparts, as tech stocks rallied in 2020 while energy declined.
ESG Funds Were Mostly Overweight Tech and Underweight Energy

None

None

None

None

None

None

None

None

None

None

None

None

None

Fund Type

Name

Communication Services

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Real Estate

Utilities

Active Mutual Fund

Parnassus Core Equity

11.3

7.9

8.5

0.0

6.2

10.6

18.2

32.5

3.4

1.5

0.0

ETF

iShares ESG Aware MSCI USA ETF

10.1

12.0

6.1

2.2

10.1

13.4

9.1

28.8

2.4

2.8

2.5

Index Fund

Vanguard FTSE Social Index

12.6

13.8

5.7

0.1

10.6

14.5

5.3

32.9

2.5

2.8

0.8

Active Mutual Fund

Stewart Investors APAC Leaders Sust

2.6

4.6

20.7

0.0

13.2

18.9

6.7

29.2.

4.1

0.0

0.0

Active Mutual Fund

Vontobel - mtx Sustainable EM Leaders

14.1

18.2

4.5

5.0

22.7

2.0

2.6

14.2

6.5

4.6

5.6

Index Fund

Northern Trust World Custom ESG Equity

8.2

12.6

6.7

2.5

13.1

13.9

8.5

24.1

3.7

2.3

2.9

Active Mutual Fund

Pictet - Global Environmental Opportunities

0.0

0.0

0.0

0.0

0.0

9.0

25.2

37.5

12.9

4.0

9.3

Active Mutual Fund

Pictet - Water

0.0

4.4

0.0

0.0

0.0

12.9

43.7

3.5

4.4

0.0

30.2

Index Fund

KLP AksjeGlobal Indeks I

10.7

12.3

6.2

2.0

10.0

13.5

8.2

28.9

2.5

2.5

2.8

Active Mutual Fund

Nordea 1 - Global Climate and Environment

0.0

0.0

4.0

0.0

0.0

4.4

36.9

32.3

15.2

1.5

5.6

Active Mutual Fund

Parnassus Mid-Cap Fund

3.3

9.4

4.0

0.0

5.7

14.8

21.5

27.2

2.6

7.0

4.6

ETF

iShares ESG Aware MSCI EM ETF

10.8

17.8

6.0

5.2

22.0

4.1

4.0

21.0

5.7

1.3

1.6

ETF

iShares Global Clean Energy UCITS ETF

0.0

0.0

0.0

2.0

0.0

0.0

25.9

22.9

0.0

0.0

49.2

ETF

iShares Global Clean Energy ETF

0.0

0.0

0.0

2.0

0.0

0.0

25.9

22.9

0.0

0.0

49.2

Active Mutual Fund

Nordea 1 - Emerging Stars Equity

11.6

20.5

9.0

0.0

25.1

2.5

0.9

27.5

1.5

0.5

1.1

Index Fund

TIAA-CREF Social Choice Equity

9.2

10.4

5.9

2.2

12.2

14.5

9.4

25.4

3.0

3.1

2.7

Active Mutual Fund

Handelsbanken Hallbar Energi

0.0

2.2

11.5

0.4

2.4

0.0

28.1

19.3

9.5

0.3

24.5

Active Mutual Fund

Putnam Sustainable Leaders

1.1

16.3

5.9

0.0

10.0

13.1

9.0

30.6

6.9

2.2

4.9

ETF

iShares MSCI USA SRI UCITS ETF

5.9

19.1

10.6

0.7

12.6

16.6

11.6

14.2

3.4

4.3

0.8

Active Mutual Fund

Calvert Equity

5.4

12.8

4.9

0.0

8.7

13.8

9.9

29.3

7.0

4.4

0.0

Holdings as reported on Dec. 31, 2020. Source: Source: Broadridge, MSCI ESG Research
Alphabet Inc., the parent company of Google, was the most commonly held stock across most funds — the stock was in 12 funds, with an average weight of 1.9% — followed by Ecolab Inc., Thermo Fisher Scientific Inc. and Microsoft Corp. The companies with the highest average weights were Apple Inc. (5.6%) and Microsoft (5.0%); the market return of these firms was 30% and 41%, respectively, in 2020. The most commonly held IT stocks were Microsoft (nine funds), followed by Applied Materials Inc. and Cadence Design Systems Inc. (eight funds each). The concentration of fund investment in these sectors has had significant impact on the recent outperformance of ESG-related funds. Despite the general absence of energy exposure in our 20 largest ESG funds, some (especially ETFs) did have minor allocations to energy stocks. Why? Because index methodology matters, and different indexes provide investors with diverse investment choices.
Carbon Intensity
Among the funds in our analysis that did not hold any energy stocks, most were actively managed; meanwhile, most that did hold energy were index-based funds. But how does that reconcile with real-world carbon emissions? The energy sector tends to score poorly on environmental issues, meaning that funds with energy exposure might have heightened exposure to pollutive companies or 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.
Funds' Weighted-Average Carbon Intensity vs. Holdings
Funds' Weighted-Average Carbon Intensity vs. Holdings
Data as of Dec. 31, 2020. Source: MSCI ESG Research
The ESG fund universe is anything but uniform. The largest of these funds very much reflect the spectrum of investors' choice and preferences, active and index-based approaches, degree of ESG integration and screens based on values and thematics. 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. A solid understanding of fund ESG policies can be essential in helping investors make the most of their fund decisions.
Rumi Mahmood
Rumi Mahmood
Vice President, MSCI Sustainability Institute

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1Within MSCI ESG Research’s universe of 4,087 Equity funds that incorporate ESG factors, as of Dec. 31, 2020.

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