Just 7% of thematic funds incorporate ESG criteria, research suggests

New research: Only 7% of thematic funds incorporate ESG criteria

UK: While thematic funds have seen strong inflows over the past four years – with assets quadrupling from less than $150bn in 2017 to over $600bn as of August 2021 – only 7% are estimated to be incorporating ESG in stock selection or index construction, according to the index provider.

Thematic funds investing in the energy transition, broad-based and technology themes collectively account for over $180bn – or 30% – of overall thematic assets.

Despite this, energy transition funds showed the highest carbon intensities, on average ranging in moderate to very high intensities, driven by exposure to a combination of subsectors facilitating carbon transition such as utilities and energy firms, Mahmood said.

Funds in this category also had the highest average revenue exposure to sustainable impact solutions.

“Thematic shifts touch every corner of our lives from the growing digital economy to smart cities and the food revolution to efficient energy and disruptive and autonomous technology,” said Mahmood.

“It is important that investors better understand their exposure to these trends as they build portfolios and make decisions around future strategies, especially as ESG integration becomes a core component of portfolio construction.

“It should be further noted that macroeconomic, geopolitical and technological trends are not short-term swings — but long-term, structural, transformative shifts. The ESG attributes of these themes may therefore naturally evolve over time.”

A thematic fund is defined as a fund with the objective of replicating, before fees and expenses, the performance of a particular theme or investment strategy. Thematic funds may be long only or use leverage and directional assets to enhance returns. They range from very broad-based themes such as “global real estate” to narrow-focused strategies such as “logistics warehousing”. They are highly targeted.

To summarize this article, ESG funds are an investment option within the broader portfolio construction process. This study found that only 7% of thematic funds are incorporating ESG in stock selection or index construction, however. Thematic funds investing in the energy transition, broad-based and technology themes collectively account for over $180 billion – or 30% – of overall thematic assets. Technology funds were largely the leaders, with over 50% exhibiting an A rating, according to the study on ESG fund transparency. The report emphasized how the carbon intensity of themes often depends on the under-lying sub-industry exposures.

In conclusion it suggests that ESG integration into investment processes is an evolving process. It suggests that investors are increasingly mindful of the importance of ESG in their portfolios, but it cautions that most funds are not yet integrating thematic exposure into portfolio construction. It is suggesting that you will need to do a little more homework to understand how the markets work.

According to Rumi Mahmood, senior associate of ESG fund research and author of the report, energy transition, resource management and cloud computing focused funds averaged the highest ESG ratings.

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Just 7% of thematic funds incorporate ESG criteria, research suggests

ESG: The New Way of Doing Business in the UK

Business and organizational sustainability is a complex issue in the UK, with many stakeholders and perspectives. It’s also an area where the stakes are high – if we don’t get it right, there will be dire consequences for our communities and the planet.

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We want everyone (not just big institutions in the UK) to be able to incorporate ESG-related risk into their actions because Companies that don’t adapt to these changes will not survive. This change has many companies in the UK scrambling to figure out how they can stay competitive and be profitable while also contributing to a better future.

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