If one were to name key industry-wide buzzwords in asset management over the past few years, ‘ESG’ would easily be at or close to the top of the list. In the United States, new money inflows into ESG mutual funds and exchange-traded-funds hit a record high of US$20 billion last year, almost quadruple the number in 2018; in Europe, new inflows of €120 billion into European ESG funds has increased the total assets in European sustainable funds to €668 billion in 2019, 56% higher than that in 2018.
The evidence so far this year has been that this trend has continued with ESG funds and indices outperforming their parent benchmarks and ESG ETF equity flows proving to be considerably more resilient that their non-ESG ETF equity counterparts.
When it comes to public policy, regulators and supervisors are also playing a more forceful role in pushing the ESG agenda. For example, European Central Bank President Lagarde has emphasised that the ongoing review of the ECB’s monetary policy strategy creates an opportunity to reflect on how to address sustainability considerations within the central bank’s monetary policy framework.
In addition, the increasing interest among asset owners when it comes to ESG has also been driving investments in this area. In fact as of 2019, 96% of UN PRI signatory asset owners’ asset under management (AuM) have been covered with missions, strategies or investment policies in responsible investments.
In what has become a more active regulatory ESG environment, and to cater to the booming demand from asset owners, asset managers have entered a new battlefield, competing on areas from ESG product offering to dedicated green campaigns. In a world where rankings have become one of the most important factors driving decision-making, from choosing a restaurant to applying to university, it is unsurprising to witness how asset managers are now trying to top one another in ESG metrics, such as green AuM, proxy voting and press coverage.
However, league tables in ESG capabilities are not as straightforward as one might imagine. Addressed in a previous DWS white paper Slaying ESG Dragons, data inconsistency has long been a difficult problem in this universe. In this paper, we reveal three major data pitfalls to watch for when assessing firms’ credentials in respect of ESG KPIs.
We focus on discerning ESG capabilities from a myriad of data metrics at a firm level, rather than at a fund level. According to the Responsible Investment Framework, introduced by the Investment Association UK, firm-level components comprise ESG integration, stewardship and exclusions, usually interconnected and used in combination. Our analysis concentrates on ESG integration and stewardship components, since exclusion involves more subjective, value-based judgements. We hope shedding light on the various approaches deployed will help to deliver more transparency is this muddy space.
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1. Morningstar (January 2020). Sustainable Fund Flows in 2019 Smash Previous Records
2. ESG Clarity (February 2020). European ESG funds pulled in record inflows in Q4 according to Morningstar
3. DWS Investment GmbH (June 2020). We monitor the performance and fund flows of the Xtrackers Equity ESG UCITS ETFs for the World, USA, Europe, Japan and Emerging Markets universe
4. European Central Bank (February 2020). Christine Lagarde: Climate change and the financial sector
5. PRI. Annual Report 2019
6. DWS Research Institute (February 2018). Slaying ESG Dragons
7. The Investment Association (November 2019). IA Responsible Investment Framework Final Report