ESG-focussed mutual funds are attracting large inflows, but fundamental challenges remain in defining what constitutes an ESG-labelled equity fund. In a systematic study of US equity funds, Barclays Quantitative Portfolio Strategy (“QPS”) team finds that ESG-labelled funds do not necessarily provide more ESG exposure than conventional funds.
“Responsible investing has become a hot topic in financial markets in recent years with many investors racing to integrate Environmental, Social and Governance (ESG) issues into their investment process,” says Jeff Meli, Head of Research at Barclays. “In this new report, our QPS team combed through two decades of funds’ holding data and found a lack of difference in holdings and investment styles between ESG-focussed and non-ESG US equity funds.”
The report, entitled ESG funds: Looking beyond the label, advocates for greater transparency in defining ESG funds, and offers several suggestions for creating explicit benchmarks that ESG funds could be measured against to address the lack of a uniform definition of what constitutes an ESG fund.
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Other key findings of today’s report include:
- ESG-labelled funds have attracted a higher percentage of inflows than other equity funds. In looking at data since 2013, we find that ESG funds have, on average, enjoyed inflows of about 7% per year, while non-ESG ones experienced yearly outflows of 2%.
- The growth in assets under management has been driven by interest in sustainable investing rather than superior performance: ESG funds have delivered roughly similar returns to other equity funds since 2013.
- As interest has grown, so has the number of investment options, with the total number of ESG funds growing significantly since 2006, and total assets under management rising to about 0.7% of the total market capitalisation of all US stocks.
The report was authored by the QPS team, which provides clients with evidence-based empirical analysis of all aspects of the investment process across asset classes, including the impact of ESG. It complements the two other pillars of Barclays’ ESG Research: our Sustainable & Thematic offering, which presents multi-decade, top-down trends and our ESG Fundamental Research offering, which assesses how ESG attributes affect financial risks and valuations.
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