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DFMs struggle on ESG absolutism with bond funds

How to "do" ESG investing properly is likely to be one of the topics discussed wherever canapes are taken in the coming year.

The first phase of growth, which might be described as 'inflows for all', has passed and the wave of new products coming onto the market is allowing allocators to be more discerning with the funds they choose. 

So Asset Allocator has had another look under the bonnet of the ESG portfolios out there, using Morningstar ratings. A five globes rating means, in the opinion of Morningstar, a fund is as ESG as can be. 

As table one shows, allocators keen to own ESG equity funds with the maximum Morningstar rating have plenty of choice, with almost 46 per cent of ESG funds in that category having a five globes rating. 

But in the fixed income space, such absolutism is harder to come by, with just 9 per cent in the five globe classification, while in the alternatives universe, 24 per cent meet the criteria. 

Next we looked at our own ESG funds database, to see which are the most widely-owned products in each asset class.  

In this context, we define "widely-owned" as meaning held by more than two of the allocators we cover. 

Within the fixed income universe there is significant clustering around the bond funds which have high ESG ratings.

Edentree Responsible and Sustainable Short-Term Bond and Rathbone Ethical Bond appear in nine of the portfolios we cover and both have a five globe rating. 

CT UK Social Bond also appears in nine portfolios and has four globes.

In terms of demand for ESG bond funds, the latest flows data from Refinitv shows outflows from all bond funds of £2.6bn, but ESG bond funds had a modest inflow in 2022. 

In the alternatives universe, Sarasin Sustainable Global Real Estate Equity is the only fund with a five globe rating to be owned by more than two of the allocators we cover, which appears in three DFM portfolios on our list. 

In equity land, some very well-known and quite widely owned funds are at the wrong end of Morningstar’s ratings.

Baillie Gifford Positive Change, Liontrust Sustainable Future European Growth, Stewart Investors Asia Pacific Sustainability, Stewart investors Asia Pacific Leaders Sustainability, Stewart Investors Worldwide Sustainability are owned by at least two of the allocators we cover and have Morningstar ratings of just three globes. 

In the world of global equities, Stewart Investors Worldwide Sustainability and Baillie Gifford Positive Growth are only owned by four DFMs each.

Ninety One Global Environment and Schroder Global Sustainable Value dominate here - owned by 10 and nine DFMs respectively - and are both rated with five globes.

The most widely owned among the above group is Stewart Investors Asia Pacific Leaders, which appears in five of the DFM ranges we cover.  

But Asia Pacific equities seems to be an area where DFMs struggle. There are only seven active funds used in ESG portfolios and three of them are run by Stewart Investors. The only other fund with a serious following is Impax Asian Environmental Markets.

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