ESG In Passive Investing: The US Equity Fund Faucet Opens

Articles From: FTSE Russell
Website: FTSE Russell

By Carolyn Eagle, senior product manager, FTSE Russell and Jack Fischer, senior research analyst, Refinitiv Lipper

Interest in ESG at all time high

More institutional investors across the globe are considering ESG than ever before.  A 2020 survey by FTSE Russell found that more than 7 in 10 asset owners globally are evaluating and implementing sustainable investment considerations in their investment strategies and among those using and/or evaluating smart beta strategies, 58% anticipate applying sustainable investment (SI) considerations to their smart beta strategy, up from 44% in 2019[1].

In North America, a region that has historically lagged other parts of the world on ESG investing, the share of asset owners that indicated interest in applying SI/ESG considerations to smart beta strategies jumped to 42% in 2020, from just 17% in 2019. Sustainable investment strategies continue to broaden, with a greater emphasis on more sophisticated approaches such as re-weighting based on SI and ESG factors (from 36% in 2019 to 55% in 2020) compared to more basic negative screening (64% in 2019 to 48% in 2020)[2].  

 Are fund flows matching interest levels?

In short, yes. The growth in interest is translating to a growth in assets in the US.  ESG/SRI AUM in the US is up to $550 billion, an 88% increase since 2018[3]. With our colleagues at Refinitiv Lipper we asked the question What kinds of ESG strategies are attracting that AUM? Firstly, it’s important to understand definitions. Lipper’s ESG/ SRI universe of funds consists of funds that meet specific criteria to obtain one of the following flags: Social, Environment, Green, Ethical, and/or Religious[4].

 Fund flow data from Lipper indicates that most of the sustainable fund flows are into passive equity strategies. In fact, according to Lipper, since the start of 2020, passive ESG/SRI funds saw ~70% of total inflows compared to active ESG/SRI funds (Chart 1) while only accounting for ~30% of total AUM in ESG/SRI funds (Chart 2).  While active ESG equity estimated net flows are hovering around zero (meaning about as much AUM is flowing out as flowing in), ESG passive equity AUM estimate net flows are positive, and even ticking up in recent months.

ESG SRI Estimated flows

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[1] Smart Sustainability: 2020 global survey findings from asset owners, FTSE Russell.

[2] Smart Sustainability: 2020 global survey findings from asset owners, FTSE Russell.

[3] Source: Refinitiv Lipper. Includes both active and previously liquidated funds (ETFs and mutual funds).

[4] Social: A flag that identifies funds that use social criteria as part of their investment policy.

Environment: identifies funds that include environmental impact in their overall process.

Green: identifies funds whose main screening criteria/investment strategy is based primarily on environmentally friendly investments.

Ethical: indicates if the fund only invests in securities identified as ethical according to its mandate and avoids investing in stocks identified as unethical.

Religious: identifies funds that have adopted investment policies and/or screens their investments based on specific religious values or beliefs.

Originally Posted on September 29, 2021 – ESG In Passive Investing: The US Equity Fund Faucet Opens

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