With few standards in place for defining ESG investment criteria, asset managers take varying approaches to incorporating ESG factors into portfolio construction processes. FUSE tracks and categorizes ESG assets according to Morningstar’s Sustainable Investing (SI) and ESG fund identification methodology, which allocates funds to the following buckets based on their investment approaches: Exclusionary, ESG Engagement, SI/ESG Impact, SI/ESG Environmental, and SI/ESG Diversified. The variance in approaches employed by asset managers is well illustrated in the chart below that tracks the ESG assets of the top-five ESG asset managers, as the full range of approaches is represented.
American Funds, the top firm in terms of total ESG assets, employs an exclusionary process that precludes certain sectors, companies, or practices from inclusion in a portfolio. Parnassus, on the other hand, focuses on improving or positively affecting a single issue through their investment—a process commonly known as “Impact Investing.” Other firms in the top five incorporate more than one approach across their product lines. Franklin Templeton, for example, manages for impact in some cases, but also offers diversified funds that must have ESG or sustainable investing as a core part of the investment process, as well as funds which name investment stewardship (also known as “engagement”) as a central part of their investment process. In addition to impact-oriented and diversified funds, iShares offers potentially less-diversified products that target environmentally-oriented industries such as renewable energy or water. And finally, Morgan Stanley employs impact, engagement, and exclusionary strategies across its fund lineup.
For asset managers, this chart highlights the importance of understanding expectations when presenting to distributor due diligence teams, placing funds on platforms, or attempting to manage to client mandates.
Top Five ESG Asset Managers by ESG Category ($'s Millions)