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May 20, 2021

Big variation in holdings of top ESG funds, says MSCI study

New research analyzes top 20 funds in MSCI’s coverage universe

The holdings of the biggest ESG funds ‘vary significantly’ given the broad range of approaches to sustainable investment, according to new research by MSCI.

The study, which looks at the top 20 ESG equity funds in MSCI’s coverage universe, underlines the importance of understanding the methodologies and objectives that sit behind individual products.

IR teams have plenty of incentive to pay attention to the make-up of ESG funds. Assets managed by sustainable funds hit a record $1.7 tn last year, according to data from Morningstar, and are predicted to continue growing strongly.

‘If you look at the top 20 largest ESG funds, you cannot compare any one of them with [another] because there’s so much diversity in their ESG policies [and] investment objectives,’ says Rumi Mahmood, senior associate at MSCI. The ESG space is ‘anything but uniform’ and ‘this is a reflection of investor choice and preferences,’ he adds.

Overall, the 20 funds in the sample manage more than $150 bn, notes MSCI, which based its data on year-end 2020 figures. Actively managed funds account for slightly more than 50 percent of the assets, with the rest split between passive mutual funds and ETFs.

Across the group, the IT sector is ‘the largest allocation in most funds,’ says MSCI. The most commonly held firm is Google parent company Alphabet, followed by Ecolab, Thermo Fisher Scientific and Microsoft.

While many funds have no investments in the energy sector, eight have exposure of at least 2 percent, finds the MSCI analysis. For example, the iShares ESG Aware MSCI EM ETF has a 5.2 percent allocation to energy.

‘A variety of [ESG] funds are likely to include energy companies, typically funds that do not take an exclusionary approach to high-carbon-intensity sectors,’ says Mahmood.

‘There are also funds that have an explicit emphasis on the development of sustainable solutions for the future, which might mean being invested in high-carbon-intensity firms today. But these firms are developing net-zero solutions for tomorrow.’

The MSCI research also notes that, while a majority of the top 20 ESG funds are domiciled in Europe, the geographical focus is more likely to be the US or global.

Although funds investing specifically in European equities are not big enough to make it into the top 20 list, overall they account for around a quarter of ESG equity assets globally, says Mahmood.

‘On average, Europe-focused ESG funds exhibit higher ESG ratings versus peer funds with other geographic focuses,’ he adds. ‘Part of that is because European policies and European companies have been ahead of the curve when it comes to adopting a lot of these practices.’