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Rumi Mahmood

Rumi Mahmood

Vice President, MSCI Research

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Some ESG Funds Are Not Like the Others

  • 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

 

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

   
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.

 

 

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

 

 

Further Reading

Fund ESG Transparency: Quarterly Report 2021

ESG Fund Ratings

Deconstructing ESG Ratings Performance: Risk and Return for E, S and G by Time Horizon, Sector and Weighting

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