The Virtue in ESG Factors
Amid a pandemic, social unrest and record-high temperatures, environmental, social and governance (ESG) strategies appear to be having a moment. Recent data from the market intelligence group at Institutional Shareholder Services Inc. (ISS)—the parent company of PLANADVISER—show ESG-focused strategies were a rare source of rapid growth for asset managers so far this year. While long-term funds suffered nearly $100 billion in outflows through June, ESG-focused funds raised $21 billion in net new money.
The interest partly stems from a desire from investors to align their investments with their views on matters such as climate change and inequality. A growing cohort views the use of ESG factors as a prudent risk control. Vulnerability to climate-change-induced flooding is a risk just like holding too much debt.
Because investors pay too little attention to ESG-related risks, measuring them is a potential path to better returns. The relatively strong performance of ESG-oriented strategies in this year’s topsy-turvy first half bolsters this argument, though whether such success stems from luck or design remains under dispute.
Net Flows Into ESG-Focused Funds
Mutual funds
ETFs
$25B
$20B
$15B
$10B
$5B
$0B
2015
2016
2017
2018
2019
YTD
Mutual funds
ETFs
$25B
$20B
$15B
$10B
$5B
$0B
2015
2016
2017
2018
2019
YTD
Mutual funds
ETFs
$25B
$20B
$15B
$10B
$5B
$0B
2015
2016
2017
2018
2019
YTD
Mutual funds
ETFs
$25B
$20B
$15B
$10B
$5B
$0B
2015
2016
2017
2018
2019
YTD
Data as of June 30, 2020. Mutual fund data includes exchange-traded mutual funds.
Largest Recipients of ESG Flows, Year to Date
|
ESG Net Flows YTD ($MM USD) |
ESG Assets |
YTD Asset Growth |
BlackRock |
$10,546.4 |
$19.9 |
113.1% |
Eaton Vance |
$2,076.1 |
$21.6 |
9.4% |
The Vanguard Group |
$1,617.2 |
$10.6 |
16.6% |
Dimensional Fund Advisors |
$1,470.5 |
$9.6 |
9.4% |
Brown Investment Advisors |
$835.7 |
$3.3 |
55.0% |
Nuveen |
$738.1 |
$1.5 |
95.2% |
TIAA |
$714.7 |
$11.0 |
7.1% |
Morgan Stanley |
$712.2 |
$8.4 |
22.8% |
DBX Advisors LLC |
$605.7 |
$2.3 |
33.9% |
Eventide Asset |
$444.9 |
$5.1 |
23.4% |
Data as of June 30, 2020
Source: ISS Market Intelligence Simfund
The main beneficiary was BlackRock, whose CEO placed sustainability at the core of the company’s future investment plans. BlackRock’s suite of iShares ESG ETFs [exchange-traded funds] soaked up approximately half of the 2020 industry total for the first half of the year. Assets in ESG-focused funds reached $192.4 billion in June, a 10.8% increase since the start of the year.
While some demand is from in-house—the ETFs are holdings in many BlackRock funds of funds—the surge would not have happened without buy-in from large advisory platforms, a sign of broadening acceptance of ESG-driven strategies within intermediaries.
For instance, institutional holdings data filed with the Securities and Exchange Commission (SEC) indicate at least $700 million of the $5.2 billion in net flows to the iShares U.S. ESG strategy came from Envestnet, the largest turnkey advisory platform in the U.S.
So far this year, active investors have gravitated to seasoned ESG specialists such as Eaton Vance’s Calvert unit. The combination of recent guidelines from the Department of Labor (DOL), plus findings in a recent ISS Market Intelligence pulse survey indicating 26% of respondents found ESG criteria to be less important, could dampen demand. Yet, there is plenty of room for growth.