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20 I Companies & Markets bne July 2020
ESG equity performance has been less stellar in Q2, more than 80% of the ESG-focused equity indices in our sample have significantly outperformed their counterparts since end-2015,” Tiftik said.
The trend also extends to ESG bonds, which have also outperformed, according to IIF. Across a commonly used set of 10 fixed-income ESG indices, 70% of them have outperformed their non-ESG counterparts this year, according to IIF.
While ESG-compliant bonds had returns that were on a par with those of non-ESG benchmarks in the first quarter of this year, 80% of ESG-dedicated fixed income indices have outperformed during the second-quarter recovery in the market relative to conventional peers.
“Out of over 135,000 funds worldwide, only 3,500 – or 2.5%
– are ESG-focused”
The results will be welcomed by companies that are increasingly investing into ESG strategies despite the lack
of rewards. The feeling amongst most corporates is that the need to be ESG compliant is inevitable and that regulation will come eventually. Moreover, fund managers are increasingly demanding ESG compliance, as they are under pressure from their investors, especially retail investors, for ESG-compliant portfolios. Having said that, ESG funds' share of the market is still in the single digits.
“Out of over 135,000 funds worldwide, only 3,500 – or 2.5% – are ESG-focused,” reports IIF. “However, with appetite for ESG investments growing rapidly in recent years, assets under management of ESG-focused funds have risen from some $340bn in 2015 to over $1 trillion at present.”
Size of the ESG fund universe has tripled since 2015
ESG funds are dominated by equity funds, which account
for a bit less than two-thirds of the total (60%), but the ESG-dedicated fixed income and mixed-allocation funds are growing faster and have more than tripled since 2015, says IIF. The advent of products such as “green bonds” and exchanges to host them are helping to drive the change.
“This is in Greening the fund universe: this is in line with robust sustainable bond and loan issuance activity since the Paris Climate Agreement in December 2015.”
ESG funds are concentrated in Europe, which is the region most sensitive to the need to go green and where the majority of regulations covering ESG have been imposed. The US securities market has noticeably imposed no ESG compliance restrictions on funds at all. Having said that, the size of US-domiciled ESG funds market has doubled since 2015,
and now accounts for over 20% of the universe, due to rising demand from investors.
ESG funds in emerging markets (EM) remain underdeveloped. The total assets under management in EM funds are currently $28bn, of which ESG funds represent less than 3% of the total.
Shift from activity-based to behaviour-based finance
By fund type, over 85% of ESG-funds are in the form of traditional open-end funds. However, exchange-traded funds (ETFs) are becoming increasingly important. Since 2015, the AUM of ESG-focused ETFs has grown by some 15x, surpassing $110bn in early June 2015 – and now comprising over 10% of the market, according to IIF.
With demand for sustainable debt instruments picking up, year-to-date issuance of sustainable bonds and loans has surpassed $200bn.
“The launch of new frameworks, including ICMA’s Sustainability-linked Bond Principles (SLBP), should add to the momentum,” says IIF. “These voluntary guidelines for sustainability-linked bonds, with debt terms tied to specific ESG
ESG-focused funds are mainly domiciled in the Euro Area
Source: Bloomberg, IIF; Real estate, alternative, speciality, commodity, private equity
Source: Bloomberg, IIF; Variable annuity, fund of funds, SMA, private equity fund, hedge fund, closed-end fund, investment trust
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