How really good are those claiming they are good?


ESG Investing – groundless marketing?

Being really caring about the environment and human rights and, therefore, deciding on ESG investing, how confident you can be that your investments do not harm our planet? CFA Institute research revealed that the major investors’ concern around ESG topic is that its integration in the investment process might be just for marketing1. To address this issue certain regulatory actions are taking place. In March 2019 European Commission unveiled its action plan on sustainable finance in an attempt to make investment managers and their clients aware of how their actions might influence the environment and the society2. In few years you will be able to realize what risks your investment portfolio could exert on bio-diversity of Amazon forests or North Sea. This initiative provided additional support to the already hot topic in the financial markets.

10 tn USD – a tremendous pile or 21 % of US managed assets was invested in funds with ESG focus in 20183, which is a fivefold increase since 2010, when the hype around the topic was just in its infancy in the region. In Europe these figures are even higher, knowing consciousness of Europeans about the climate change and responsible social governance. It is obvious that ESG is one of the underlying reasons for capital migration: mutual fund with ESG focus have a certain tailwind in asset growth.

However, might it be that the asset managers market their products skipping proper research on ESG? We decided to question whether ESG-focused funds follow their stated investment objectives and select environment-friendly and socially good companies with transparent and plausible corporate governance structure. For that we have selected the largest funds, which use ESG layer as investment criterion, and compared their portfolio holdings with the benchmark (selected MSCI USA as benchmark due to the funds’ bias towards US companies) and quality companies on governance, social and environmental dimensions, focusing on quantitative analysis and taking median ratios as a base.

Environmental Dimension

First, we have compared the largest by AUM funds with ESG overlay, quality companies and MSCI USA on four basic criteria, which show their environmental footprint (Fig.1). CO2 and waste emissions comparison shows that the majority of considered funds look superior to the benchmark. Noteworthy, quality companies exhibit even better story than the benchmark and the ESG focused funds.

Fig. 1: Environmental criteria, ESG Funds vs. MSCI USA vs. US quality stocks, 2018

Source: Hérens Quality Asset Management, Reuters ; MSCI USA as dotted line

Median use of water and energy of ESG funds’ holdings with few exceptions is lower as compared to the benchmark. And again, quality companies with regard to resource usage are more efficient than the average ESG funds’ holding. It is being stated that by 2022 the environmental factors are to become more relevant for stock and bond investing than the governance factors2, and obviously this has already translated into the increased attention of the ESG fund managers.

Social Dimension

The availability of the company’s social performance numerical ratios is rather limited, as often it assumes qualitative assessment. Quantitative evaluation can also be made but is rather limited, and is primarily based on the ratios related to employees. Two selected ratios, lost-injury-time rate (LTIR) and employee turnover show that, perhaps, this ESG dimension deserves less attention from the ESG funds managers.

Fig. 2: Social criteria, ESG Funds vs. MSCI USA vs. US quality stocks, 2018

Source: Hérens Quality Asset Management, Reuters ; MSCI USA as dotted line

Market average LTIR is lower than the average rate for the companies selected by ESG fund managers (Fig. 2). The same is also relevant for the employee turnover: 11% for the market vs. 11.9% for ESG funds’ holdings. Quality companies also cannot boast about low turnover rates, but their LTIR is significantly lower than that of the market, which is partially explained by lower exposure to the industrials, where LTIR is significantly higher.

Governance Dimension

Board independence, probably, is the first criterion to be checked when evaluating quality of the governance. However, we saw no significant difference in level of independence among the three groups we compared: all were in the range of 80-90%, which is a decent level. The same applied to the board meeting attendance–robust 75% for the market and for the considered ESG funds.

Fig. 3: Governance criteria, ESG Funds vs. MSCI USA vs. US quality stocks, 2018

Source: Hérens Quality Asset Management, Reuters ; MSCI USA as dotted line

Certain difference is seen when it comes to women representation in BoD: ESG funds tend to select companies with proportionally more women in Boards as compared to MSCI USA. But they lag benchmark companies on salary gap ratio having it at 123 vs. 116. Quality companies also here look very good on both governance ratios having lower salary gap and higher women representation.

Concluding remarks

Having conducted quantitative study on ESG fund’s holdings, we have obtained mixed results: ESG funds pay attention to the firms’ environmental performance, but social ratios are being largely ignored. Additionally, we found that quality investing can be regarded as ESG investing without proactively considering ESG factors, as the study shows that US quality companies also proved their quality according to ESG factors, which corresponds to our statement made before.

ESG Funds considered in research: Ariel Fund, TIAA-CREF Social Choice Equity Fund, Vanguard FTSE Social Index Fund, Putnam Sustainable Leaders Fund, Neuberger Berman Equity Income Fund, Calvert Equity Fund, Parnassus Core Equity Fund.


1. CFA Institute research (2019). ESG Integration in Europe, the Middle East, and Africa: Markets, Practices, and Data.

2. European Commission (2019). Sustainable finance: Commission’s Action Plan for a greener and cleaner economy.

3. U.S. SIF Foundation (2018). Report on U.S. Sustainable, Responsible and Impact Investing.

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