Funds that invest sustainably love tech companies – and Alphabet in particular.
MSCI studied the year end 2020 holdings of the 20 largest funds that invest based on environmental, social and governance considerations. These funds account for about 13% of total assets in ESG equity funds. They include active and index-based strategies.
The information technology sector of the S&P 500 accounted for the largest allocation in most funds, according to MSCI’s analysis. Funds’ holdings in these stocks ranged from 3.5% of their assets to more than 37%.
Most of the ESG funds in the study had well over 20% of their assets in IT.
Meanwhile, energy stocks accounted for a minimal portion of the funds’ holdings. This helped the ESG funds outperform last year, as tech rallied while energy declined.
Indeed, Google’s parent company was held in 12 of the funds — making it the most widely held stock among the participants — with an average weight of 1.9% at year end, according to the study.
The next most widely held stocks were Ecolab, Thermo Fisher Scientific and Microsoft.
“The largest areas where most funds were invested were tech, industrials and health care,” said Rumi Mahmood, senior associate, ESG research at MSCI. “Tech companies have been the ones that have been the best performers. These companies were chosen not because they were tech, but because they fulfilled some sort of ESG criteria.”
Higher concentration
Google’s parent was present in more of the ESG funds, but Apple was the stock that accounted for the highest concentration within these portfolios.
The funds held Apple at an average weight of 5.6%, followed by Microsoft at 5%.
Other top stocks held by ESG funds include Applied Materials, Cadence Design, Adobe and Texas Instruments, according to MSCI’s analysis.
Mahmood notes that depending on which area it operates in, a tech company may not be as carbon intensive as stocks in other sectors. “There’s a large dispersion,” he said.
Mahmood points out that the largest ESG funds cannot easily be compared since they all have different mandates. However, index-linked funds took in more money last year than actively managed funds.
Largest ESG funds
The largest ESG fund is the Parnassus Core Equity Fund, which is actively managed and has about $23 billion in assets, according to MSCI’s research.
Next is the iShares ESG Aware MSCI USA ETF, with $13 billion in assets, according to the report. Rounding out the top three is the Vanguard FTSE Social Index Fund, an index-based fund with $10.9 billion.
All three are U.S. based and focus on U.S. assets.
Meanwhile, the iShares ESG Aware MSCI USA ETF brought in the most new inflows of the 20 funds in the study, with $7.1 billion in 2020. The iShares Global Clean Energy ETF followed in a distant second with close to $4 billion in new money.
Energy holdings
Mahmood said the most widely held energy stock among the biggest funds was Oneok, held by five funds. Next were Hess, Cheniere, Chevron and ConocoPhillips, all held by four of the funds.
“What’s unique about oil and gas companies in the past year is they all came out and released net zero statements,” said Mahmood. The energy industry’s comments are in response to the Paris Agreement on climate change goal of net zero carbon emissions by 2050.
“The assumption is they are the most carbon intensive companies,” Mahmood said, but he noted that the most carbon-intensive funds were not necessarily those with energy holdings.
The extent to which a fund is carbon intensive is based on the carbon intensity of its individual stock holdings. For instance, iShares ESG Aware MSCI EM ETF had the highest amount of energy holdings among the 20 funds, at 5.2%. But it was rated moderate in terms of carbon intensity.
In the utilities sector, another area thought to be carbon intensive, the top holding among the funds was American Water Works, held by eight funds. Eversource Energy and Consolidated Edison were next, each held by six funds.
The top financial firms held by the funds were Charles Schwab, CME Group, Marsh and McLennan, Moody’s and BlackRock, in that order. Each were held by seven of the funds.
Communications services were led by Alphabet. The next most widely held names were Discovery, Electronic Arts, and Cable One.
Thermo Fisher Scientific was the most widely held health company, appearing in 10 funds. That was followed by Danaher Corp, Agilent Technologies and Cerner Corp.