It’s no secret that environmental, social, and governance (ESG) factors are becoming top of mind for a growing number of investors, particularly Millennials. Bloomberg reports a 37% increase in the assets of ESG investment funds, to $445 billion in 2017, citing issues such as energy efficiency, water scarcity, safety, and diversity as key areas of interest for investors. But a key question for investors in this space is how to measure the ESG quality of a given investment fund. Until recently, that meant intensive, time consuming research into the individuals holdings of a fund at any given time. But now, the MSCI ESG Quality Score, a service provided by Fundata Canada, provides a reliable metric for investors.

The growing demand for ESG-screened investments has had a trickle-down effect as retail advisors, asset managers, and institutional players have all started dedicating more resources to the ESG space in order to meet client demand. Pension funds too are turning to ESG analysis for the long-term sustainability implications that come with strong management in the environmental, social, and governance areas. The effects are also noticeable among mutual funds, with a positive upward trend in the ESG Quality Score since April 2017.

The ESG Quality Score (0-10) is an aggregation of the ESG ratings in the underlying holdings of a fund. Larry Lawrence, Executive Director, ESG Products at MSCI says, “by providing the ESG scores and metrics for more than 30,000 mutual funds and ETFs, ESG Research offers the critical look-through tools to evaluate and analyze a fund’s underlying holdings and make more informed ESG investment decisions.”

Looking at these ESG scores allows investors and advisors to see what the fund managers are doing from an ESG perspective, regardless of whether or not the fund is managed with an ESG mandate. Using these scores can also shed some light on the ESG outlook for the fund universe as a whole.

The average ESG Quality Score has risen across equity funds in each of the past 15 months with an average monthly increase of 0.45%. The increase in average ESG Quality Score from August 2017 to August 2018 was 5.5%. The accompanying graph shows the monthly average ESG Quality Score across equity funds in Fundata’s database.



This overall increase in the scores begs the question, Is it the mutual fund managers shifting their focus and analysis to include ESG factors, or is it the publicly-traded companies themselves behaving more responsibly?

Without access to the scores of the individual equities, I looked at the holdings from some of the funds that have had the biggest increase in ESG Quality Score. I started by screening out only the funds with an ESG score of 5 or higher in order to focus on the funds that have an established ESG base to begin with.

The fund with the biggest increase was Scotia Private Canadian Mid Cap Pool, which saw its ESG Quality Score rise 26% over the past year, to 5.94. Table 1 is a look at how the top 10 holdings have changed for the fund from August 2017 to June 2018 (the most recent available holdings):

The biggest addition to the top 10 is Cott Corporation, which provides “water and coffee services.” The company states, “Our brands are committed to a sustainable future. We take advantage of environmentally friendly processes that support the health of the planet. We are also committed to giving back to the communities we serve. Our successful sustainability programs have saved money, reduced landfill waste, and overall fuel consumption.” that an ETF was traded out of the total number of trading days, the highest being 250 out of 250 or 251 out of 251, depending on the time frame. Of the ETFs that have filed ETF Facts, just over half have traded every day, while about 10% have traded less than 100 days during the year. The smallest number so far is 17 days out of 250, which works out to less than two days per month.

A second fund with a significant increase in ESG Quality Score is Ninepoint Focused U.S. Dividend Class. The score rose 24% over the past year, to 5.42, facilitated by the addition of Thermo Fisher Scientific Inc. That company’s stated mission is “to enable our customers to make the world healthier, cleaner and safer.” Table 2 shows the fund’s holdings changes over the period.

These are simply two examples of funds that have allocated significant capital to quality companies and by no means provides insight on how managers are viewing ESG in general. But it does show two funds, and there are many other examples, that don’t have an ESG investing mandate that have significantly increased the ESG quality of their portfolio with some key additions.