UK equity funds outperforming in ESG scores

The 2021 FE fundinfo ESG Market Review, which was published today, found that the average UK equity fund had a score of 8.60 based on MSCI’s ratings process, about two points higher than those with a global (6.88) or regional focus (6.46), and three points higher than the average of 5.55 for emerging market equities.

The report also found that the vast majority of UK equity funds (97.7%) were classed as ‘ESG leaders’ under MSCI’s methodology, compared to less than 40% of global and regional funds, and only 4% of emerging market portfolios.

UK equity funds’ strength in ESG scores came from the strong governance within UK companies, as when governance was taken into consideration alone, the average score for UK funds stood at 6.42. This compares with 5.11 for global funds and just 4.83 for regional funds.

Furthermore, of the 16 sectors covered by the report, UK groups all ranked highest on governance, with IA UK Smaller Companies, IA UK Equity Income and IA UK All Companies beating out the competition. They were followed by IA European Smaller Companies, IA Europe Including UK and IA Europe Excluding UK.

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However, UK equity funds were found to be falling behind when it comes to the environmental and social elements of ESG, where they are underperforming global and regional portfolios on both measures, while being narrowly beaten by emerging market strategies in the social factor.

The report found that the European equity sector was the areas with the highest environmental and social scores, while global funds also performed well.

The report also found that UK equity funds tend to have a greater exposure to ‘controversial’ stocks than other funds, with about 60% of UK equity funds owning businesses that derive at least 5% of revenues from alcohol and more than half owning companies that make weapon-system components. About two-fifths of UK portfolios had links to nuclear power, gambling or genetically modified organisms.

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Oliver Oehri, co-head of the ESG product group at FE fundinfo, said: “Awareness of ESG factors has been growing amongst investors in recent years and is increasingly shaping their outlook and governing their decisions. The 2021 FE fundinfo ESG Market Review then is published at an opportune time for investors in allowing them to understand how the UK funds landscape is addressing the challenge of responsible investing.

“The report offers some interesting and sometimes surprising insight, and the often-counterintuitive results are an important reminder of the inherent difficulty of categorising, comparing and rating ESG funds.

“For many investors it may come as a shock for example to find funds with large holdings in weapons manufacturers or gambling companies scoring so highly, yet when governance factors are taken into consideration these companies are often better run than others in less controversial industries.

“It is important to remember that ‘ESG’ and ‘ethical investing’ are not synonymous, and the report is a timely reminder of the need for investors to carry out their own in-depth research when it comes to aligning their principles with their investments.”

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