ESG-labeled Funds: What’s behind the label?

Some of the largest asset managers in the world have embraced ESG investing in recent years. These funds purport to align more closely with consumers’ interest in corporate sustainability, and its loose definition of improvements in environmental, social and governance (ESG) issues.  

These ESG-labeled ETFs align with a noticeable uptick in consumer interest in ESG investing. 

• Global assets in ESG-labeled electronically traded funds (ETFs) grew from $5 billion in 2006 to $391 billion in 2021. 
• A majority of both institutional investors (76%) and retail investors (69%) express interest in ESG investing. 
• 83% of consumers support companies who engage in shaping ESG best practices and 86% of employees prefer employers with aligned values. 

Yet, “ESG” label doesn’t always lead to what many retail investor consumers would consider a meaningful ESG impact. 

Major players’ ESG momentum

The largest asset managers in the world are the US-based companies, BlackRock, Vanguard, and Fidelity Investments. Their entry into ESG investing not only signaled its mainstream acceptance, it created significant momentum for the space. 

All of them have signed the United Nations’ Principles of Responsible Investment. Signatories are expected to integrate ESG issues into analysis and decision making, practice active ownership, and encourage invested companies to disclose ESG issues. 

Many of the managers created ESG-themed ETFs following the Paris Agreement. Fidelity launched two sustainability focused index funds in 2017. Its full suite has now grown to eleven ESG-themed funds. 

Blackrock launched its first full suite of ESG-labeled funds in October, 2018. In 10 months, the ESG funds had eight times more traffic than its conventional funds. Blackrock’s ESG funds make up one fifth of all those in the US, which total $295.2 bn. Yet, these funds account for 2.5% of its total AUM and demand for its funds has scaled back in 2022.  

Vanguard’s compact lineup of seven sustainable funds attracted more than $1.8 billion during the year, boosting the firm into first place for 2022.

Overall, ESG funds account for 6% of the available funds by number and 1.5% of AUM, meaning there is significant room for more growth over time. On the other hand, the industry already has its share of growing pains. 

ESG fund slowdown in 2022

While new inflows into sustainable funds reached 39% in 2020 and 30% in 2021, 2022 showed significantly less growth at 0.9%. Considering overall fund inflows in 2022 contracted by 1.3% the slight growth in ESG-labeled funds still suggests relatively positive investor interest. 

ESG label downgrades in Europe and SEC penalties for misleading ESG claims by fund managers reflect changes intended to improve the validity of ESG credentials. As a result, AUM in ESG funds could drop, but the ESG credentials of existing funds will be more reliable. 

Anti-ESG actions have also led to some ESG-linked divestments. 

How impactful are large asset managers?

ShareAction, a charity promoting responsible investment, recently graded the world’s top investment funds for their ESG performance. The same asset managers–Blackrock, Vanguard, State Street Global Advisors and Fidelity–all scored D or E according to the ranking system. Their investments account for $60tr of the $77tr in assets under management evaluated in the study. 

Morningstar research suggests that there are a few things holding large asset managers back from strong ESG impact. For one, their ESG funds track non-ESG indices, so they lack the heightened commitments of a dedicated ESG strategy. They also lack the power to propose shareholder resolutions, given their share of influence. 

In contrast, the same study suggests smaller investment managers have higher ESG commitments. It rated Impax and Parnassus highest, with 100% of fund assets held in ESG-focused strategies. These funds manage $10.5 billion and $38.0 billion, respectively. 

Getting past the ESG confusion

An ESG label doesn’t always translate into desirable ESG improvements. To choose funds with specific ESG performance, you’ll need impact-linked data to compare them to other funds. Yet, most investment platforms don’t give you enough information to do this. 

This is where we come in. Yourstake gives you the tools to evaluate both financial and ESG performance of funds, which are detailed by a wide range of discrete criteria using our Portfolio Designer. A fund’s performance is outlined in a way that gives you as much or as little detail you need.  

This helps advisors build custom values-aligned portfolios with verifiable investment impacts for both financial and ESG performance. It also helps them unpack aggregated data for funds that lump ESG performance into a single rating. 

Test it out: Build a custom portfolio using ESG data on the Yourstake platform. 

‍