AUM in ESG funds hit another record. Inflows in August & YTD were more than double the prior year & could accelerate further. E and S factors have mattered more than overall ESG scores in driving alpha. We find ESG investing has worked best in Energy. Our ownership analysis finds US ESG funds increased their exposure to Energy most, and reduced their exposure to Tech.
ESG inflows double those of last year and could accelerate
Assets under management (AUM) in 2,300+ global ESG funds hit a record $1.65tn in August, according to data from EPFR, double that of a year ago and growing at 3x the rate of non-ESG funds. Year to date, $3 in every $10 moving into equities is going into ESG. While the pace of monthly inflows has slowed in recent months, 2021 remains on track for a record year of ESG asset gathering with flows in August and year to date more than double what they were the prior year. And flows could accelerate into year-end if seasonality trends from the last two years hold.
For alpha, E & S factors matter more than overall scores
As investors take a more nuanced approach to ESG, the drivers of ESG outperformance are changing. Globally, the strongest alpha signals year to date have come from social factors like community relations and occupational health and safety and carbon emissions-related environmental factors, whereas Sustainalytics’ overall ESG scores failed to add alpha. In August, supply chain environmental impacts and resource use were other ESG factors that drove wide performance dispersion. ESG factor performance has also varied by sector, and we find ESG investing has worked best in Energy and Materials over the last month as well as year to date. Within Energy, environmental factors broadly generated alpha YTD, but the single most alpha-generative factor was actually in governance (business ethics).
From brown to green: US ESG funds add Energy, reduce Tech
ESG funds globally are more underweight Energy than any other sector relative to the benchmark. But as we discussed in our recent ESGMeter launch for the Energy sector (see reports for US and Europe), the sector may not be as “brown” as it seems. Some ESG funds may be recognizing this as well: US ESG funds increased their exposure to Energy more than any other sector over the last month. Meanwhile, ESG funds in the US and Europe have reduced their exposure to the Technology sector, long a favorite of ESG funds for its “green” reputation but perhaps not always warranted. Want to know which other sectors and stocks are most and least crowded by ESG funds? Check out our regional screens in Exhibits 30-59.
66% of ESG indices have outperformed YTD
66% of the global ESG indices that we track have outperformed their regional (non-ESG) benchmark year to date (through 8/31), tracking above the 1Y hit rate of 60% but below the 3Y hit rate of 71%. Year to date, ESG index outperformance has been most pronounced in Emerging Markets and North America, while the hit rate in other developed markets has been mixed.