Barclays raised concerns about fund managers jumping on board with the environmental, social and governance-related trend in name only, and suggested more transparency is needed to identify investments that truly fulfill ESG objectives.
The United Kingdom’s second largest bank, with GBP 1.39 trillion ($1.82 trillion) in total assets, released a report on Thursday examining funds dating back to 2013 that carried the ESG label. The bank said it found little difference in holdings in ESG and conventional funds.
“ESG funds are not really different from conventional funds in terms of holdings, risk exposures and therefore performance,” said Barclays. “This conclusion holds even for the subset of funds that changed their designation from non-ESG to ESG-focused.”
The bank found that ESG funds had higher, but not significantly different ESG ratings than other funds.
A wide variety of funds fall under the ESG label. On one end are funds that finance environmental projects, such as Deutsche Bank’s green bond, released in May, which will funnel EUR 500 million ($591 million) toward renewable energy, energy efficiency and green building projects. On the other end are funds which simply screen out objectionable securities, such as Vanguard’s ESG U.S. Stock exchange traded fund, whose top holdings are tech companies, such as Microsoft, Apple, Amazon and Alphabet.
In addition to “ESG” covering a broad range of funds, each fund manager determines its own criteria for weighting securities.
“Measuring a fund's ESG focus is everything but straightforward,” wrote Barclays. “There is a lack of consensus on how many and what aspects of E, S and G should be assessed in each relevant dimension, and as a result, different providers score ESG-related criterion differently.”
The bank also mentioned that there is little correlation between securities’ environmental, social, and governance scores, further muddling the picture. Going forward, funds should provide greater transparency and investors should scrutinize holdings more closely for ESG objectives, Barclays said.
“Investors need to do far more due diligence to ensure that their investments do indeed align with their objectives,” Barclays cautioned.
Investors, who have collectively shifted funds away from non-ESG and into ESG-labeled funds since 2019, are charged a higher expense ratio for the ESG label, particularly in the last year, according to Barclays. Since 2013, ESG funds saw average inflows of 7%, while non-ESG funds had outflows of 2%.
These funds have historically mirrored non-ESG funds in performance, though they have shown better returns since mid-2019.
The bank also called on regulators to standardize data production and reporting on environmental, social, and governance fund construction and performance, which, “could go a long way toward mitigating current issues around ESG definition, measurement and scoring.”