Barclays launches systematic study of ESG-focussed US equity funds

A new systematic study of US equity funds by Barclays’ Quantitative Portfolio Strategy (QPS) team has found that 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.

According to the report, 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 cent per year, while non-ESG ones experienced yearly outflows of 2 per cent.

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  per cent 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.