PGIM Investments, the global investment management arm of Prudential Financial, noted in its latest semi-annual survey of fund selectors in Europe and Asia that while they were aligned in their global growth outlook, investment grade ESG allocations and the need for more reporting transparency when selecting ESG equity funds, there were also some key differences.
The survey gathered insights from 150 investment managers and professionals located in Europe, as well as 60 professionals in Asia, who are responsible for selecting equity and fixed income products for their firms with net assets under management of at least $1bn, referred to as ‘gatekeepers’ by PGIM.
Based on the top three choices of the respondents, fund selectors in Europe prioritised positive screening, such as best-in-class ESG companies (total of top three choices at 61%), while their Asian counterparts showed a preference for thematic investing, such as companies focused on renewables, natural capital, etc. (69%).
European fund selectors are showing a greater inclination to exclude traditional energy companies and carbon emitters from their investment portfolios in order to meet carbon reduction targets, according to the survey. About 10% of European fund selectors have already taken this step, while an additional 21% plan to do so within the next 2-3 years. In contrast, only 6% and 8% of Asian respondents reported currently excluding traditional energy companies and planning to do so in the near future, respectively. This indicates a stronger sentiment among European fund selectors towards divestment from traditional energy companies compared to their Asian counterparts.
In contrast, among Asian fund selectors, 40% have expressed plans to ‘gradually and cautiously’ divest from traditional energy companies in the coming years, indicating their willingness to adapt and embrace changes. This suggests that while the percentage of Asian fund selectors currently excluding traditional energy companies may be lower, a significant portion of them are actively considering and preparing for such divestment in the near future.
Fund performance is priority
When it comes to evaluating ESG funds as investment options, performance is the key consideration, just like with typical funds. The PGIM survey reveals that ‘fund performance’ ranked as the top selection characteristic for both standard equity funds and ESG equity funds. Among fund selectors, 66% identified performance as one of their top three choices for ESG equity funds, while 82% did so for equity funds. This indicates that performance remains a primary factor in the decision-making process for evaluating investment options, regardless of whether they are ESG or standard equity funds.
Moreover, most of the fund selectors, accounting for 85% of them, highly prioritise a fund’s performance track record spanning five or more years, considering it to be of utmost importance. This makes it the most critical factor in their evaluation process.
According to the survey results, US equity, global equity, and emerging markets equity are identified as the top targets for increased allocations in the next 12 months. The responses indicate that there will be net increases in allocations for U.S. equity and global equity, while intentions for emerging markets equity remain consistent with previous survey results.
The rise in allocations for US equity and global equity is primarily driven by gatekeepers in Europe, who have shown increased commitments in these categories. In contrast, gatekeepers in Asia are inclined towards emerging markets equity, domestic equity and private equity for increased allocations. However, there is a reduction in allocation plans for US equity and global equity among fund selectors in Asia.
Almost two-thirds of decision-makers indicate that they are currently investing in ESG equity funds, while the remaining respondents have plans for future investments in this category. Among the gatekeepers, 54% are currently utilising ESG fixed income funds, with 46% having plans to invest in this category in the future.
ESG reporting transparency
The gatekeepers also believe that asset managers can promote greater allocations to ESG equities by providing more transparent and detailed reporting. They also see clearer terminology and standards, as well as dedicated in-house resources for ESG issues, as areas with significant potential to accelerate the allocation of funds towards ESG investments.
PGIM released the survey on 14 March.