UK equity funds are outperforming their peers when it comes to ESG governance scores, new research from FE fundinfo has revealed, but lagging on environmental and social issues.
The 2021 FE fundinfo ESG Market Review, which provides a snapshot of how the UK fund industry fares in terms of ESG, ethical and impact factors, found the average UK equity strategy had a score of 8.60 based on MSCI’s ratings process.
This compares to 6.88 for global funds and 6.46 for regional funds. For emerging market equities, the average fund had an ESG score of just 5.5.
According to the research, 97.7% of UK equity funds were also classed as ‘ESG leaders’ under MSCI’s methodology. Less than 40% of global and regional funds were given this rating and only 4% of emerging market portfolios.
Driving the performance of UK equity funds’ ESG scores was a trend for strong governance within UK companies, with three UK groups of the 16 equity fund sectors covered – IA UK Smaller Companies, IA UK Equity Income and IA UK All Companies – holding the highest average governance scores.
However, UK equity funds were found to be falling behind their peers when it comes to the environmental and social elements of ESG, where they are underperforming global and regional portfolios on both measures.
The research also looked at a fund’s exposure to businesses and sectors deemed as ‘controversial’ including alcohol, tobacco and munitions, and found that while funds in the UK equity category achieved the highest average ESG scores overall, they also tend to have greater exposure to morally controversial stocks than other sub-groupings.
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 Market Review 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.”
Oehri added: “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.”