Most professional investors prefer funds that integrate ESG

Europe boasts the highest percentage of ESG fans, while Americans are the most sceptical.

Support for sustainable investing shows no sign of abating, even as stocks with higher environmental, social and governance (ESG) ratings lag their peers.

Nearly two-thirds of professional investors prefer using active funds that integrate ESG, with equities (80%) over bonds (58%) being the most popular asset classes globally to gain ESG exposure, according to a new study by investment manager Capital Group.

However, this year the MSCI World ESG Leaders index has fallen 10.5% compared with a 9.5% drop for MSCI’s regular global index.

ESG Leaders has just 2.6% invested in energy stocks versus nearly 5% for its non-ESG equivalent. Oil stocks have been among the best performers this year due to higher oil and gas prices.

Sustainable funds also tend to own more expensive “growth” shares, which have low carbon footprints and are involved in renewable energy technology, as opposed to cheaper “value” shares.

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High inflation levels and rising interest rates have benefited value shares at the expense of growth shares.

Jessica Ground, global head of ESG at Capital Group, said: “ESG adoption rates appear to be firmly embedded among professional investors globally, with a growing preference for active managers to make the critical investment decisions.

“This preference underscores the complexity of assessing ESG issues and that reducing them to a single ESG score cannot capture nuanced company evaluations. Investors are hence turning to active managers that can focus on deep proprietary research, robust monitoring systems and engagement to analyse companies.”

There are different levels of regional support for ESG. Europe boasts the highest percentage of ESG users (93%), while Asia-Pacific saw the largest increase in ESG users of any region over the past year (to 88% from 81% in 2021).

The survey also found that, compared to those in other regions, more Europeans consider ESG to be “central” to their investment approach (31% vs. 26% globally), while investors in North America have the least conviction in ESG, with fewer than one in five reporting that ESG is central to their investment approach.

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Despite support from professional investors, the first three months of 2022 saw the biggest quarterly slowdown for three years in the amount of money invested in ethical or sustainable funds on a global basis.

Data provider Morningstar calculated that global sustainable funds attracted close to $97 billion (£77 billion) of net new money in the first quarter of 2022, representing a fall of almost 36% compared to the fourth quarter of 2021.

However, such funds held up notably better than the broader market, which saw inflows slump by 73% over the period; attracting $138 billion versus $517 billion for the fourth quarter of 2021. 

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