Active Funds Dominate ESG — But Their Market Share Is Slipping

While the pandemic hasn’t damped investor demand for ESG, asset flows to U.S. active managers fell in the first half of 2020, according to Broadridge.

Bing Guan/Bloomberg

Bing Guan/Bloomberg

Actively managed funds have dominated when it comes to investing based on environmental, social, and governance factors — but rising investor demand for ESG in the U.S. appears to favor passive investment strategies this year.

Global assets in ESG mutual funds and exchange-traded funds have more than doubled in the past five years to $1.3 trillion in June, according to a new report from Broadridge Financial Solutions. While Europe leads the world in ESG investing, the fastest growth is stemming from the U.S.

ESG funds in the U.S. are on pace to surpass $300 billion of assets by the end of next year, according to the report. While actively managed equity funds have historically led the investing strategy, low-cost passive funds are grabbing market share.

Active funds saw 52 percent of net ESG flows in the U.S. in 2019 — a share that dropped to 35 percent in the first half of 2020, according to the report. Still, the pandemic has not slowed investor demand for ESG, with active and passive funds together attracting a record volume of assets in the first quarter that was matched in the following three months.

“Much of the activity historically has been in Europe and cross-border funds,” Jag Alexeyev, director of global distribution insights at Broadridge, said in a phone interview. “The U.S. is now growing rapidly.”

BlackRock, UBS Group, Amundi, BNP Paribas, and Nordea are the top ESG fund managers based on net flows in the 18 months through June, according to Broadridge. BlackRock attracted by far the most assets over the period at $42 billion, with just 7 percent flowing into actively managed funds, the report shows.

Switzerland’s UBS ranked second based on net asset flows of $15 billion over the same period, while French asset manager Amundi was the third most successful with $12 billion collected. Actively managed funds represented 46 percent of UBS’s net flows and 61 percent of Amundi’s.

“Despite the rising popularity of index funds, ESG represents one of the most attractive segments for active fund managers,” Broadridge said in the report. Eighty-one percent of assets overseen by European ESG funds are actively managed, compared to 68 percent for the U.S.

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ETFs and passive funds are creating more ways for investors to invest in ESG, Alexeyev said. To keep their edge, he said active managers may seek to combine shareholder engagement with companies with the integration of ESG factors — such as the risk of climate change — into their investment decisions.

The most popular ESG investment strategy involves “best-in-class,” positive screening, representing 39 percent of assets globally, according to Broadridge. The investment approach weights allocations toward companies with stronger scores relating to environment, social, and governance criteria.

Exclusion strategies that keep certain types of companies out of investment portfolios, such as tobacco or weapons firms, are the next largest category with 25 percent of ESG assets, the report shows. Investing strategies focused on ESG integration and proactive company engagement are the third most popular based on 20 percent of total assets.

Exclusion strategies had been the most sought after by investors in 2015, capturing 36 percent of net ESG flows globally that year, according to Broadridge. By contrast, the strategy attracted just seven percent of net asset flows during the first half of 2020.

Over the past five years, the ESG industry has evolved away from the “values-based, simple exclusion approach embedded in the early version of socially responsible investing,” said Alexeyev. Today’s efforts are more focused on assessing “ESG risk factors” across a much broader range of companies, he said, noting that many passive funds follow “best-in-class approaches.”