Top 20 Largest ESG Funds - Under the Hood - Apr 2021

The Top 20 Largest ESG Funds ? Under the Hood

Rumi Mahmood April 2021

MSCI ESG Research LLC

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Contents

3 Introduction 4 Twenty Largest ESG Funds 8 Exposures and Positioning 12 Carbon Intensity 14 Fund Selection ? Piece(s) of Cake

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Introduction

ESG funds have experienced rapid growth as of late. As with much in financial markets, with great growth comes great influence, and even greater scrutiny. Investors are increasingly inquisitive about the holdings of funds that claim to incorporate ESG into its analytical procedures, and rightfully so. Aside from the financial materiality aspect of ESG considerations, for many investors it's important for a fund's holdings to align with their own values and principles. ESG funds currently offer investors a spectrum of sustainability, creating challenges for those looking to align their capital with their values. Simply put, not all ESG funds are the same as their ESG policies and the resulting sustainability attributes can vary significantly. In this report we looked at the largest equity ESG funds globally, their holdings and ESG attributes, alongside things to consider when conducting ESG fund due diligence and selection.

Key Findings:

? The 20 largest ESG funds in our coverage collectively accounted for approximately 13% of total assets under management globally in ESG equity funds. There was an almost even split between active and index-based fund investment approaches, with active funds accounting for over 57% of AUM.

? Information technology was the largest sector allocation for most funds, with almost no allocation in energy. Google was the most commonly held stock across most funds; Alphabet Inc. was included in 12 funds, with an average weight of 1.9%.

? Despite the overall low allocation to energy, there were 11 funds that both held energy stocks and exhibited a lower carbon intensity than those with no energy exposure, highlighting the fact that single stock allocations were not always the main driver of a fund's overall ESG attributes.

1 Within MSCI's fund universe of coverage as of Dec 31, 2020.

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Twenty Largest ESG Funds

The 20 largest ESG funds in our coverage held more than USD 150 billion in assets combined, as of December 31, 2020. Collectively, these 20 funds represent approximately 13% of the total assets under management (AUM) globally in ESG equity funds.

Despite their nominal similarities these ESG funds vary widely in their manager's investment approach and holding composition. There is a nearly even split between indexbased and active funds, including both mutual funds and ETFs. Active funds accounted for a slight majority of held assets, holding over 50% of total AUM; while the remaining AUM held by index-based funds were divided evenly between mutual funds and ETFs (Exhibit 2). A number of thematic funds were also featured in this list of active and index-based strategies, namely water and clean energy products, collectively accounting for approximately USD 20 billion.2

The funds varied widely in tenure and domicile, the oldest fund has been managed for more than 30 years old, and the youngest for just over five. But two-thirds of total AUM (over USD 100 billion) was held in funds less than twenty years old (Exhibit 3), and half of them were domiciled in Europe where ESG adoption has been long established. However, the geographic focus of most funds was U.S. equities.

2 All fund characterizations based on data from Broadridge and MSCI ESG Research, as of Dec. 31, 2020

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Exhibit 1: Top 20 Largest ESG Equity Funds by AUM

#

Name

1 Parnassus Core Equity Fund

Assets USD Inception Billion

22.94

1992

Domicile U.S.

Geographic Focus

U.S.

Fund Type Active Fund

MSCI ESG Peer Percentile

Rating

Rank3

A

83rd

2 iShares ESG Aware MSCI USA ETF

13.03

2016

U.S.

U.S.

Index-based ETF

A

82nd

3 Vanguard FTSE Social Index Fund

Stewart Investors Asia Pacific Leaders 4

Sustainability Fund Vontobel Fund - mtx Sustainable 5 Emerging Markets Leaders Northern Trust World Custom ESG 6 Equity Index Pictet - Global Environmental 7 Opportunities

8 Pictet - Water

10.87 9.87 9.58 8.69 8.31 8.02

2000

U.S.

U.S.

Index-based Fund BBB

Pacific ex

2003

UK

Active Fund

A

Japan

Emerging

2011 Luxembourg

Active Fund

A

Markets

2013

Ireland

Global Index-based Fund

A

2010 Luxembourg Global

Active Fund

AA

2000 Luxembourg Global

Active Fund

AA

41st 61st 81st 35th 89th

-

9 KLP AksjeGlobal Indeks I Nordea 1 - Global Climate and

10 Environment

11 Parnassus Mid-Cap Fund 12 iShares ESG Aware MSCI EM ETF 13 iShares Global Clean Energy UCITS ETF

7.69 7.37 6.90 6.83 6.52

2004

Norway

Global Index-based Fund

A

2008 Luxembourg Global

Active Fund

AA

2005

U.S.

U.S.

Active Fund

A

2016

Emerging

U.S.

Index-based ETF

A

Markets

2007

Ireland

Global

Index-based ETF

A

31st 89th 98th 98th 45th

14 iShares Global Clean Energy ETF 15 Nordea 1 - Emerging Stars Equity Fund 16 TIAA-CREF Social Choice Equity Fund

6.51 6.41 6.32

2008

U.S.

Global

Index-based ETF

A

Emerging

2011 Luxembourg

Active Fund

A

Markets

1999

U.S.

U.S.

Index-based Fund

A

45th 87th 86th

17 Handelsbanken Hallbar Energi

5.85

2014

Sweden

Global

Active Fund

A

77th

18 Putnam Sustainable Leaders Fund

5.81

1990

U.S.

U.S.

Active Fund

A

92nd

19 iShares MSCI USA SRI UCITS ETF

5.63

2016

Ireland

U.S.

Index-based ETF

AA

99th

20 Calvert Equity Fund

5.37

1987

U.S.

U.S.

Active Fund

A

95th

Source: MSCI ESG Research LLC and Broadridge as of Dec. 31, 2020

3 Percentile rank of the fund within its peer group and within the global universe of funds in the MSCI coverage universe.

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3 bn

Exhibit 2: Fund Strategy Breakdown

Strategy Active Fund Index-based Fund Index-based ETF

# Funds 11 4 5

AUM USD Billion 96.43 33.58 38.52

0 bn

Index-based Active

USD 72.1

USD 96.4

# Funds

Exhibit 3: ESG Fund Age and Assets Under Management

60

8

AUM USD Billions

7 50

6

40

5

30

4

20

3

2

10 1

0 0-10

10-20

20-30

Fund Ages, Years

0 30-40

AUM USD Billions

# Funds

Source: Broadridge and MSCI ESG Research as of Dec. 31, 2020

The order of size and order of flows in the top 20 are different. Index-based strategies saw the lion's share of inflows, exceeding over USD 20 bn (Exhibit 5). The iShares ESG Aware MSCI USA ETF alone witnessed in excess of USD 7 billion in flows. Thematic funds ? clean energy,

water - were particularly popular in 2020 collectively witnessing over USD 15 bn in flows, two listings of the iShares Global Clean Energy ETF saw collective flows in excess of USD 7 billion.

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Exhibit 4: Top 20 Ranked by Flow in 2020

Fund iShares ESG Aware MSCI USA ETF

Flows USD Millions (12 mo.) 7,126.0 M

Pictet Environmental Opp

4,227.1 M

iShares Global Clean Energy (US Listing)

3,986.5 M

iShares Global Clean Energy UCITS ETF

3,522.2 M

Handelsbanken Hallbar Energi

3,454.9 M

iShares ESG Aware MSCI EM ETF

3,345.5 M

Nordea 1 Glob Climate

2,957.3 M

iShares MSCI USA SRI UCITS ETF

2,599.7 M

Vontobel Fund mtx Sust EM Leaders

2,345.6 M

Northern Trust World Cst ESG

1,927.7 M

Nordea 1 - Emerging Stars Equit

1,599.3 M

Vanguard FTSE Social Index Fund

1,347.2 M

Parnassus Mid Cap Fund

963.0 M

Parnassus Core Equity Fund

686.3 M

Calvert Equity Fund

574.4 M

KLP AksjeUSA

471.9 M

Pictet-Water

444.1 M

TIAA-CREF Social Choice Equity

307.3 M

Putnam Sustainable Leaders Fund

-385.6 M

Stewart Investors Asia Pacific

-953.9 M

Source: MSCI ESG Research LLC and Broadridge as of Dec. 31, 2020

Exhibit 5: Top 20 Flow by Fund Type

4,054 M

Fund ESG Rating A AA A A A A AA AA A A A

BBB A A A A AA A A A

20,580

15,912 M

M

Index-based Fund Index-based ETF Active Fund

Source: MSCI ESG Research LLC and Broadridge as of Dec. 31, 2020

Fund Type Index-based ETF

Active Fund Index-based ETF Index-based ETF

Active Fund Index-based ETF

Active Fund Index-based ETF

Active Fund Index-based Fund

Active Fund Index-based Fund

Active Fund Active Fund Active Fund Index-based Fund Active Fund Index-based Fund Active Fund Active Fund

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Exposures and Positioning

Exhibit 6: Sector Exposures ? Tech vs. Energy

Fund Sector Holdings (%)

Communication Services

Consumer Discretionary

Consumer Staples Energy

Financials Health Care Industrials Information Technology Materials Real Estate Utilities

Name

Parnassus Core Equity iShares ESG Aware MSCI USA ETF Vanguard FTSE Social Index Stewart Investors APAC Leaders Sust Vontobel - mtx Sustainable EM Leaders Northern Trust World Custom ESG Equity Pictet - Global Environmental Opportunities Pictet - Water KLP AksjeGlobal Indeks I Nordea 1 - Global Climate and Environment Parnassus Mid-Cap iShares ESG Aware MSCI EM ETF iShares Global Clean Energy UCITS ETF iShares Global Clean Energy ETF Nordea 1 - Emerging Stars Equity TIAA-CREF Social Choice Equity Handelsbanken Hallbar Energi Putnam Sustainable Leaders iShares MSCI USA SRI UCITS ETF Calvert Equity

11.32 10.10 12.56 2.64 13.18 8.77 0.00 0.00 10.74 0.00 3.29 10.76 0.00 0.00 11.59 9.19 0.00 1.12 5.95 5.37

7.88 11.99 13.82 4.59 17.05 10.52 0.00 4.38 12.25 0.00 9.35 17.83 0.00 0.00 20.46 10.37 2.19 16.34 19.08 12.84

8.52 6.05 5.66 20.69 4.19 5.49 0.00 0.00 6.23 4.00 4.03 6.05 0.00 0.00 8.99 5.89 11.55 5.94 10.56 4.92

0.00 2.15 0.05 0.00 4.59 0.99 0.00 0.00 2.02 0.00 0.00 5.18 2.01 2.01 0.00 2.20 0.44 0.00 0.72 0.00

6.17 10.06 10.56 13.23 21.57 10.93 0.00 0.00 9.99 0.00 5.66 21.97 0.00 0.00 25.15 12.17 2.40 9.97 12.62 8.74

Source: MSCI ESG Research LLC and Broadridge as of Dec. 31, 2020

10.61 13.43 14.45 18.93 1.88 12.79 8.97 12.87 13.52 4.42 14.77 4.06 0.00 0.00 2.48 14.52 0.00 13.06 16.63 13.79

18.17 9.13 5.31 6.66 2.37 5.07 25.17 43.75 8.21 36.94 21.53 3.99 25.94 25.94 0.89 9.44 28.07 8.98 11.57 9.92

32.48 28.79 32.90 29.15 19.84 22.28 37.53 3.47 28.88 32.31 27.22 21.00 22.86 22.86 27.46 25.40 19.30 30.55 14.23 29.34

3.38 2.36 2.48 4.11 5.97 2.52 12.86 4.41 2.53 15.16 2.55 5.72 0.00 0.00 1.45 2.95 9.52 6.90 3.41 7.02

1.47 2.79 2.79 0.00 4.23 2.66 4.05 0.00 2.52 1.52 7.03 1.32 0.00 0.00 0.45 3.14 0.29 2.19 4.27 4.40

0.00 2.54 0.77 0.00 5.13 1.24 9.27 30.25 2.78 5.64 4.56 1.59 49.17 49.17 1.06 2.67 24.49 4.94 0.82 0.00

Sector exposures across the funds revealed that information technology was the largest allocation in most funds, and an almost zero allocation in energy (Exhibit 6). This was one of the key drivers behind the shorter-term recent outperformance of ESG funds relative to their nonESG counterparts, as tech stocks rallied in 2020 whilst energy declined.

Google was the most commonly held stock across most funds; Alphabet Inc. was in 12 funds, with an average weight of 1.9% (Exhibit 7), followed by Ecolab, Thermo

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Fisher Scientific and Microsoft. The companies with the highest average weight across the funds were Apple (5.6%) and Microsoft (5.0%); the market return of these firms was 30% and 41% respectively in 2020. It should be noted however, that turnover takes place within funds and the ranks and weighting held by these companies may not have been constant for the entirety of the year, and that this analysis represents an end of year snapshot.

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