It has often been said that the ESG funds universe is a work in progress, with some regions seeing a greater preponderance of funds of this type than others.
So we have had a look to see if the number of ESG funds used by allocators in different regions has grown since we started tracking them.
Well, the number of European equity funds used in ESG portfolios has seen the biggest percentage increase since mid-2022 – rising 45 per cent across the period.
At the other end of the spectrum, the UK has seen almost zero piquing of interest as it becomes the only region where the number of funds used by DFMs has gone down.
The UK stock market is more heavily composed of traditional industries such as tobacco, oil and gas, and mining – all three of which are viewed by some investors as old-economy firms ripe for disruption.
Andrzej Pioch, fund manager at LGIM, gave us an explanation as to why Europe may be leading the sustainable charge.
“I think what investors always need is some sort of clarity on the ESG credentials of the underlying funds. And Europe moved quicker than the UK,” he says.
“Though the UK is catching up with SDRs [sustainability disclosure requirements] – that could change the regulatory landscape and give investors more confidence about those underlying ESG credentials of the funds they look at.”
“I think the regulatory angle explains why at the moment three-quarters of sustainable funds are domiciled in Europe,” he adds.
Another noteworthy region in our database is Japan – where the number of funds available has remained stuck at a very low level.
Just five sustainable Japanese funds are owned by the DFMs we cover and none of these are actively managed.
This contrasts to the 21 active Japanese equity funds owned by allocators in our non-ESG database.
Overall, however, the number of US, Europe, Asia, and emerging markets being used has increased over the past two years.
And LGIM fund manager Francis Chua believes it’s been encouraging for investors to select from a wider basket of region-specific sustainable equity funds available.
“From a fund selector’s perspective it’s been really good to see the growth of building blocks. A couple of years ago if you wanted to build a multi-asset ESG portfolio you’d have to use global equity options,” he says.
“If I wanted to buy Japan or Asia-Pacific, for instance, there wasn’t a product that offered me ESG credentials plus the regional-specific exposure. I think today you can.”
For Chua, other financial instruments could benefit from the same level of granularity as sustainable equities.
“ESG and equities have formed a long partnership,” he adds. “I think we need to see that happening in other asset classes, such as fixed income and alternatives.”
