Last year saw a huge increase in interest in ESG investing [1]. As a result ESG funds saw record inflows as Environmental, Societal, and Governmental (ESG) issues rose up the financial agenda. This was deemed to be due to the increasing demand for lower risk assets, increasing awareness of environmental and social issues, both accelerated by the COVID-19 pandemic.
Below are five of the largest funds which describe themselves as ESG. As we have warned many times before this is no guarantee that these funds have or have not invested in firms or organisations which you yourself would consider to be ESG. Therefore, it is important to verify that the funds underlying holdings match your own definition of ESG.
In order to do this we have provided a link for each of the funds to our sister site, Search My Fund, which gives a full breakdown of a fund’s holdings.
The fund size given is for the 31st January 2021 and denominated in GBP.
1. Royal London Emerging Markets ESG Leaders Equity Tracker Fund
Fund Size: £2.16bn
Full Holdings: Search My Fund
Launched in 2017 this fund aims to track the MSCI Emerging Markets ESG Leaders Index [2]. This fund seeks to balance risk and reward by investing in high growth emerging market equities which also have good ESG ratings. The ESG selection criteria is dictated by MSCI ESG Research. Over the past two years this fund has almost doubled in size [3].
2. BlackRock Global Funds ESG Multi-Asset Fund
Fund Size: £1.55bn
Full Holdings: Search My Fund
This fund invests in a wide range of financial instruments including equities, bonds, and other funds. Although titled an ESG fund, the fund managers are at liberty to invest in a wide range of assets, ESG or not. MSCI ESG Research criteria, however, are used as a way of assessing the portfolio as a whole as well as individual investments. In order to be included in the MSCI ESG Fund Ratings greater than 65% of the fund’s ‘gross weight’ must be covered by the MSCI ESG Research criteria. That is 65% of the total values minus cash holdings [4].
3. Federated Hermes Global Equity ESG Fund
Fund Size: £1.25bn
Full Holdings: Search My Fund
This equity fund was launched in 2017 and favours companies with a good track record and/or have an improving ESG rating. Federated Hermes have developed their own ESG ratings system. By using these proprietary ESG ratings, as well as other risk indicators, this fund seeks long term capital growth of global equities.
4. Vanguard ESG Developed World All Cap Equity Index Fund
Fund Size: £1.21bn
Full Holdings: Search My Fund
This passive Vanguard ESG fund seeks to track the FTSE Developed All Cap Choice Index. The ESG criteria of this fund are defined by which companies are allowed in the FTSE Developed All Cap Choice Index. This index excludes “companies involved in Non-Renewable Energy (Nuclear Power, Fossil Fuels), Vice Products (Adult Entertainment, Alcohol, Gambling, Tobacco), Weapons (Civilian Firearms, Controversial Military Weapons, Conventional Military Weapons)” [5].
5. BlackRock Strategic Funds ESG Euro Bond Fund
Fund Size: £570.29m
Full Holdings: Search My Fund
This fund specialises in Euro denominated fixed income securities, of which 80% must be investment grade. Although not integral to the fund’s portfolio composition, the fund does use the MSCI ESG Fund Ratings benchmark. In order to be included in the MSCI ESG Fund Ratings greater than 65% of the fund’s ‘gross weight’ must be covered by the MSCI ESG Research criteria. That is 65% of the total values minus cash holdings [4]. This is the same ESG method as BlackRock Global Funds ESG Multi-Asset Fund above.
Conclusion: ESG Investments
The above investments could be considered to be ESG investments since they invest via ESG rating systems. These are usually defined by either external ESG rating agencies or the investment management companies themselves. However, only by investigating each fund’s investment holdings can you really be sure whether your definition of ESG aligns with theirs.
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Remember, the value of your investments may go down as well as up and you may not get back the value you initially invested.
References
- https://www.ft.com/content/8e9f8204-83bf-4217-bc9e-d89396279c5b
- https://www.msci.com/documents/10199/c341baf6-e515-4015-af5e-c1d864cae53e
- https://www.rlam.co.uk/globalassets/media/literature/sales-aids/56456-rl-emerging-markets-esg-leaders-equity-tracker-fund-sales-aid.pdf
- https://www.msci.com/documents/10199/255936/MSCI_ESG_Fund_Metrics_Exec_Summary_Methodology_May2017.pdf/01a4aa33-ebfb-4a53-9c49-04acbd140485
- https://research.ftserussell.com/Analytics/Factsheets/Home/DownloadSingleIssue?issueName=FGCACN&IsManual=false
