What should your position in the ESG market be?

(Edited based on feedback about market sizing and intentionality)

I have been running briefings on ESG integration models, trends and lessons for equity fund managers for the last few weeks. The two things I know about equity managers is that (a) they will leave if they don’t think it’s worth it because time management is key to good investing, and (b) they like numbers.

So I built this chart on the demand for equity management and ESG in the US. It’s both interesting and uses numbers!

I first set out with a quadrant chart because I love quadrant charts and also because it creates a sense of the spectrum of investment demand.

I don’t categorize investments by returns but by fees because returns are unpredictable and ESG investing is more expensive to do because of the additional data requirements and considerations. The vertical axis is ESG intentionality which captures the intentions of the manager.  

The key trends are:

• The largest change in asset management is not ESG but active to passive which shouldn’t be lost in this discussion
• There is very little movement from passive non-ESG to passive ESG. Why would that be? My guess is cost (hard to be low fee with ESG considerations and data requirements) and perception of a lack of dynamic intentionality. An example of some dynamism in a relatively passive product is Blackrock-Westpath’s Transition Ready.
• Existing active managers are increasing their ESG intentionality (low increase with an ESG policy, higher with specific portfolios and new reporting) due to client demand.
• I tried to capture what is happening with existing ESG investors (mainly Socially Responsible Investors). I see a movement towards lower fee but similar intentionality as more products come online. An example is Thornburg Better World Int Fund. But they are also moving some of their equity allocation to much higher intentionality outside of public equities by allocating to impact investments.

I think the amount being moved around is open to debate. I have used the USSIF numbers for active and ETF.com for passive. I would say that the USSIF tends to optimistic on the ESG. I would say that less than $2trn has moved into reasonably high ESG intention investing at this stage. 

So there we are. The chart was well-received. I will try to build one for Australia.