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.
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.
"This report continues a series of studies by the QPS team investigating the impact of a portfolio’s ESG tilt on performance and other aspects of the investment process, covering both credit and equity markets," says Lev Dynkin, Head of QPS Research.
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Notes to Editors
Barclays has long been a pioneer in sustainable banking. In 2012, Barclays Research launched the Impact Series which explores the social impact of economic, demographic and disruptive changes affecting markets, sectors and society at large. In 2016, Barclays and Unreasonable Group co-founded Unreasonable Impact, an accelerator programme aimed at supporting growth-stage entrepreneurs whose ventures have the potential to employ thousands of people worldwide while solving some of the world’s most pressing social and environmental challenges. In 2019, Barclays announced a new Sustainable and Impact Banking team; and hosted its second annual Green Frontiers event, bringing together investors and financiers to discuss the growing challenge of climate change. Barclays also launched the Social Innovation Facility that incubates financial products and services that will have a sustained social or environmental impact. And, in 2020 Barclays announced our ambition to be a net zero bank by 2050.
Barclays is a British universal bank. We are diversified by business, by different types of customer and client, and geography. Our businesses include consumer banking and payments operations around the world, as well as a top-tier, full service, global corporate and investment bank, all of which are supported by our service company which provides technology, operations and functional services across the Group. Barclays offers investment banking products and services in the US through Barclays Capital Inc. For further information about Barclays, please visit our website home.barclays.
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