ESG Related Mutual Fund

1. Description of Socially Responsible and ESG Mutual Funds

A mutual fund is a financial instrument in which a pool of money is collected from the
investors to invest in securities like stocks and bonds. On behalf of investors, the Funds
Managers manage these funds with an aim to bring capital gains on this investment. Each
investor or shareholder participates proportionally in the gains or losses made by the fund.
The performance of the fund managed by the asset management company (AMC) is tracked
by the market capitalization of that fund. This has been the traditional way of conventional
investing. Globally, mutual funds hold less than 10% of Global equity market. Since the past
decade, there has been a growing emphasis on incorporating ESG(Environmental, social and
Governance) aspects into financial assessments. The reason is twofold: (a). The international
and respective national policies, aiming to make the world sustainable, thus promoting
incorporation of ESG into these instrument (b). The growing interest of investors in these
funds as many a times these funds have shown better returns and resilience.

ESG funds are gaining importance as they make the funds more resilient by minimizing
business risks of the company. Investors have lost huge chunks of money because of failures
in manging ESG risks. The regulatory procedures are also rapidly changing because of which
any noncompliance can lead to increase in business related risks impacting the returns to the
investors. Thus, the growing willingness to invest in ESG funds is also for gaining competitive
advantage.

Responsible investing promotes the perspective of looking into risks and returns in a holistic
way. This means considering both risk and return by analysing environment, social and
governance related factors. ESG funds are portfolios of different investments where
environment, social and governance factors have been taken into consideration during the
investment process. All the companies and investments made under ESG funds will be
investing in portfolios which have high score in sustainability elated criteria. For example, the
company should not have any contingent liability related to environmental pollution, poor
labour relation or higher carbon footprint. Currently, in the United States, one in four dollars of
professionally managed assets are currently in socially responsible investments. The global
ESG mutual fund industry, focusing exclusively on funds whose main objective is ESG
related, reached $2trn at the end of June 2019, 6% of total assets.

2. Trends in ESG Mutual Funds

Some of the key trends in ESG investing space are as follows:
 Increase in Asset Under Management in ESG linked funds: According to Global
Sustainable Investment Review, assets under management within the ESG space
grew from 34% to from 2016-2018. Currently there are 2000 ESG-labelled funds with
total value of asset under management is 740 Bn USD.
 Growth of ESG funds in the times of COVID19 pandemic: As per S&P, some of
the biggest funds set up under ESG criteria outperformed the broader market during
corona crisis. For example, the Brown Advisory Sustainable Growth Fund, had a
negative 5.4% price change in the year through market close April 9, compared to a
13.7% decline in the S&P 500. Globally, investors invested 45.6 billion USD into ESG
funds in the first quarter of the year compared to outflows of 384 billion USD for the
overall fund universe
 ‘G’ of ESG remains the dominant factor: Within ESG funds, governance still
remains a dominant factor as money market funds have high exposure to financial
institutions. This is followed by the social and then environment.
3. What constitutes the ESG Mutual Funds?
The three main category of ESG related Mutual funds are as follows:

Style Definition Example

ESG Exclusionary Can exclude companies that
do not meet certain
sustainability criteria
ESG Inclusionary Seeks positive sustainability
outcomes by tilting a portfolio
towards ESG Factors.
Impact Investing Generates positive measurage
and reportable social and
environment impact along with
financial returns.
Fossil fuel free, tobacco free,
weapon inclusion
Environmentally friendly, low
carbon footprint gender lens
Green bonds, clean energy
finance, impact funds

4. Financial Performance of ESG related funds compared to conventional funds?

 Risk adjusted return: Gil-Bazo et al. (2010) conclude that Socially Responsible
Mutual Funds SRMF have a superior risk-adjusted performance compared to
conventional funds before and after adjusting for costs. They also found that when
SRMF were managed by companies specializing in social responsibility, SRMF
(Socially Responsible Mutual Funds) outperformed conventional funds. As per the
study by Morgan Stanley, ESG related mutual funds provide returns in line with
conventional funds while reducing the risk.

Funds that bet on companies that perform better on ESG criteria are one of the
fastest-growing asset groups in the U.S. More than 140 ESG funds that have been
have launched globally this year. According to Bloomberg's ranking, some of the ESG
funds have delivered strong positive returns, a marked contrast to most investable
assets in negative territory this year. Figure 1 shows the performance of ESF funds
compared to the conventional funds. It can be observed that in short, medium and
log term horizon, ESG Mutual funds gave better returns than the total return for S&P
500.

Figure 1: Performance of ESG Funds compared to the Total return for S&P 500
  Fund Flow: Bollen (2006) concludes that monthly fund flow volatility of Socially
Responsible Mutual Funds SRMF is lower than conventional funds, thus making it a
better choice for the investors.

5. Region-wise ESG Mutual Funds: United State of America, Europe and Asia

The largest amount of sustainable investing assets is in Europe (US$14.1 trillion), followed
by the United States(US$12 trillion). The total AUM with an ESG mandate in the US grew at a
four-year CAGR of 16% compared to a 6% in Europe. Flows into sustainable funds reached
US$20.6 billion in 2019, compared to US$5.5 billion in 2018. Assets managed by funds in
Europe that incorporate ESG criteria into their strategies grew by 56% in 2019 to €668 billion.
More than 50 of the 360 funds started last year had a climate-oriented mandate. Similarly, the
ESG Exchange traded funds and products saw a three-fold increase in 2019 from 2018 from
US$20Bn to US$60B AUM. A closer look at the Money Market funds which are mutual funds
that invest only in ultra-safe investments such as Treasury securities that are guaranteed by
the U.S. government shows a similar trend. Global assets under management (AUM) in
Environmental, Social and Governance (ESG)-focused money market funds (MMFs) grew
by around 30% across 35 funds in 2019 to EUR70 billion. ESG MMFs remain concentrated in
France, accounting for around 75% of global ESG MMF AUM as of end-2019. New fund
launches and conversions increased in 2019, notably in the US, but conversions of existing
funds exceeded launches. AUM growth in US MMFs was particularly strong in 2019, although
from a low base.

Beyond dedicated ESG MMFs, traditional MMFs are incorporating ESG factors in their
investment process. For example, the GS Euro Liquid Reserves Fund adopted ESG factors in
its investment process in October 2019.
 The driving force behind ESG at investment management firms is evolving and leading to
increased fund launch activity. Client demand from both retail and institutional investors is
now the top reason reported by money managers to incorporate ESG factors into investment
decisions. 
1.
 6. Top ESG Funds to invest globally

Score Benchmar
Rank Fund * k index Focus Assets ($M)
Russell
Brown Advisory Sustainable 1000 Environmentall
1 Growth (BIAWX) 97.45 Growth y Friendly
Russell
1000
2 Calvert Equity (CSIEX) 91.41 Growth ESG
Religiously
3 Ave Maria Growth (AVEGX) 86.66 S&P 500 Responsible
Russell
Putnam Sustainable Leaders 3000
4 (PNOPX) 84.36 Growth ESG
Vanguard FTSE Social Index FTSE4Goo Socially
5 (VFTSX) 84.09 d US Responsible
Dow Jones
United
States
Islamic Religiously
6 Iman (IMANX) 77.06 Market Responsible
Calvert U.S. Large Cap Core Russell
7 Responsible Index (CSXAX) 76.13 1000 ESG
Neuberger Berman Sustainable
8 Equity (NBSRX) 74.99 S&P 500 ESG
Environmentall
9 Green Century Equity (GCEQX) 74.4 S&P 500 y Friendly
Ave Maria Rising Dividend Religiously
10 (AVEDX) 74.39 S&P 500 Responsible

S&P 500 returns  

7. Future outlook of ESG Related Funds

According to Morningstar, by the end of March 2020, the assets of sustainable funds, which
focus on companies that rank high on Environmental, Social, and Governance (ESG) issues,
were down 12 per cent from their all-time high at the close of 2019. This was lower than the
18 per cent decline for the global universe of all the funds. In Asia ESG funds performed
better than in Europe and North America. The assets under ESG in Asia increased by 21%.
This could be attributed to the fact that COVID 19 has highlighted the issues. This is a
positive trend and will usher a new era of stakeholder led capitalism- the idea that a public
company’s focus shouldn’t only be generating profits to reward shareholders without taking
the bigger picture into account.
References

 Advancing environmental, social, and governance investing. (2020). Deloitte Insights.

https://www2.deloitte.com/us/en/insights/industry/financial-services/esg-investing-
performance.html

 Bloomberg - Are you a robot? (2018, November 30). Bloomberg.

https://www.bloomberg.com/tosv2.html?vid=&uuid=bf21f000-f443-11ea-8b68-
1f564e44a3c8&url=L2dyYXBoaWNzLzIwMTgtdGVuLWZ1bmRzLXdpdGgtYS1jb25zY2llbmNl
Lw==

 Deloitte Center for Financial Services. (2020). Advancing environmental, social, and
governance investing: A holistic approach for investment management firms. Deloitte.

 European ESG funds pull in record $132 billion for 2019. (2020, January 31). Pensions &
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 Iacurci, G. (2020, January 14). Money moving into environmental funds shatters previous
record. CNBC. https://www.cnbc.com/2020/01/14/esg-funds-see-record-inflows-in-2019.html

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Retrieved September 11, 2020, from
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 ESG exchange-traded funds and products add $65 billion in 2020. (2020, June 25). Pensions
& Investments. https://www.pionline.com/interactive/esg-exchange-traded-funds-and-
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 Fitch Ratings. (2019). Global ESG Money Market Fund Dashboard: End-2019.

 M.F.V.M.S.I. (2014, November). Environmental Mutual Funds: Financial Performance and

Managerial Abilities. Researchgate.
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l_Performance_and_Managerial_Abilities

 Sustainability: The future of investing. (n.d.). BlackRock. Retrieved September 11, 2020, from
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 Stevens, P. (2020, September 2). ESG index funds hit $250 billion as pandemic accelerates
impact investing boom. CNBC. https://www.cnbc.com/2020/09/02/esg-index-funds-hit-250-
billion-as-us-investor-role-in-boom-grows.htm

 The Top Sustainable Mutual Funds. (n.d.). Wallstreet Journal. Retrieved September 11, 2020,
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