Introduction

The past few months have brought a growing transatlantic polarization of attitudes and practices relating to Environmental, Social and Governance (ESG) investing. Where the ESG debate in the U.S. has become more politically contentious1, European investors remain more committed to the principles of managing both the risks and opportunities, supported by regulatory and industry dynamics.

For global investors, however, this produces challenges. European and U.S. investors, while still typically regionally biased in their equity exposures, have global investment portfolios and seek to invest in both markets (whether via global mandates, regional mandates or both).

In this market review, we compare European and U.S. strategies using two specific lenses, although there are, of course, many quantitative and qualitative criteria to consider when taking an ESG-oriented approach. Firstly, a ‘Paris Aligned Benchmark’ (PAB) lens is applied, in order to determine how many stocks would have to be excluded from active managers’ portfolio for an investor that did not wish to have exposure to non-PAB companies and consider some tracking error implications. Secondly, we take a brief look at a measure of carbon footprint for the two fund manager groups.

Key takeaways:

• European active large cap equity mutual funds contain a far lower proportion of stocks that do not appear in Paris Aligned Benchmarks, making them theoretically more compatible with a PAB screen (for an investor that wishes to apply one or move in this direction).
• The median European equity fund has a higher carbon footprint than their U.S. counterpart – a side-effect of the larger proportion of ‘growth’ funds in the market.
• This picture is continually evolving and investors must not be complacent. For example, a strategy that currently appears quite PAB-friendly (and thus minimally affected by screening) may not necessarily remain so.
• ESG-oriented investors should scrutinize asset managers’ changes at both corporate and strategy level with care, as well as underlying portfolios.

Authors

Aurore Porteau de La Morandière
ESG & Quant Researcher,
Scientific Portfolio …………………………………………..

Shahyar Safaee
Deputy CEO and Business Development Director,
Scientific Portfolio

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