UK equity funds outperform on ESG scores

The average UK equity strategy has a ESG higher score than global or regional focused funds according to the 2021 FE fundinfo ESG Market Review.

The review found that UK equity funds had an average score of 8.60/10 based on MSCI’s ratings process. This is around two points higher than those with a global (6.88) or regional focus (6.46). For emerging market equities, the average fund had an ESG score of just 5.55.

97.7% of UK equity funds were also classed as ‘ESG leaders’ under MSCI’s methodology. Less than 40% of global and regional funds were given this rating, and only 4% of emerging market portfolios.

FE fundinfo says underpinning the performance of UK equity funds’ ESG scores is a trend for strong governance within UK companies, however, UK equity funds are falling behind when it comes to the environmental and social elements of ESG, where they are underperforming global and regional portfolios on both measures.

The research also considered a fund’s exposure to businesses and sectors deemed as ‘controversial’, including industries such as alcohol, tobacco and munitions. While funds in the UK equity category achieved the highest average ESG scores overall, the report shows they also tend to have greater exposure to morally ‘controversial’ stocks than other sub-groupings.

Around 60% of UK equity funds own businesses that derive at least 5% of revenues from alcohol, while more than half owned companies that make weapon-system components. Meanwhile, around two-fifths had links to nuclear power, gambling or genetically modified organisms. Some groupings had more exposure than others: three-quarters of UK funds held companies that make weapon-system components, 72.2% of emerging market strategies held firms making or selling alcoholic beverages and half of global funds were exposed to nuclear power, for example.