The intersection of finance and ethical issues has created a growing demand for Socially Responsible Investing (SRI) and Environmental, Social and Governance (ESG) investing guidelines. More and more advisors are looking to offer these investment solutions to meet the needs of their clients—who seek to be more “green” in how they invest. In turn, many asset managers are looking to enter the space through either product development or firm acquisition. At BNY Mellon, we understand the growth of these products given that our broker-dealer and asset management clients continually look to us for unique insights.
The first insight we share with clients to help them understand the growth of this space, is to clearly define the inclusionary/exclusionary properties between SRI and ESG. Although often combined under a single “green investing” umbrella, SRI and ESG investing have distinct differences. For example, SRI standards employ negative screens that prohibit investing in certain companies deemed to be socially offensive, depending on specific criteria. We often classify these types of funds as "exclusionary." For example, you would find the following language within the principal investment strategies of an SRI defined fund: The Fund will not invest in securities issued by any company that is involved in the production or wholesale distribution of alcohol, tobacco, or gambling equipment/enterprises.
On the other hand, ESG investing encompasses more of a universal and holistic approach; the process is more “inclusionary.” These funds focus more on companies that appeal to the socially-minded investor. For example you would find the following language within the principal investment strategies of an ESG defined fund: In selecting investments for the Fund, decisions are guided by a framework for considering environmental, social and governance (“ESG”) factors.
For the purposes of an analysis to help further inform our clients, we focused more on ESG fund trends as it is a relatively newer concept and also the faster growing segment. To put these groups in context, ESG represents around 1% of total mutual fund assets, whereas the broader SRI represents roughly 1.2%. Together, these two groups represent just 2.2% of mutual fund assets growing at roughly 8%. In Q1 2019, we saw ESG mutual funds record a 2-year compound annual growth rate (CAGR) of 13.6%, compared to SRI funds at 3.4%--while overall mutual funds saw a 2-year CAGR at 3%. To better understand ESG growth rates, let’s look at the breakout of assets by asset class and investment style.
U.S. Equity accounted for 51% of all ESG funds. International and global equities accounted for 32% and taxable fixed income 15%. Given the significant amount of U.S. equities in this group, it is no surprise that ESG has seen only modest growth of late. This falls in line with the ongoing trends of U.S. equity mutual funds posting relatively low growth rates (3.5%) while international/global equity and taxable fixed income products saw CAGRs of 36% and 21%, respectively. Below are percentages of total assets and corresponding CAGRs for the top ten investment styles within these asset classes.
A unique aspect of the Intermediary Analytics data set is our ability to drill down into various advisor programs. One of the most significant trends we have seen over the last five years has been the growth of the fee-based business at the expense of the commission-based business. Even in tremendous periods of mutual fund growth as we saw in 2016 and 2017, commission-based programs saw consistent outflows. When looking at ESG assets by advisor type, we notice a few very important trends emerge.
In Q1 2019, 74% of ESG assets were on fee-based programs, up from 70% in Q1 2017. Commission-based assets fell from 30% to 26%. When you start to drill into the specific fee-based program types, you see some separation in terms of growth. Rep-as-PM4 assets increased from 21% of ESG assets in 2017 to 28% in Q1 2019. Rep-as-Advisor and Firm Discretionary programs stayed relatively flat during that timeframe.
When looking at growth rates it is not surprising that Rep-as-PM leads with a 2-year CAGR of 37%, compared to firm discretionary programs at 18%, Rep-as-Advisor6 at 13%, and commission-based at 9%. In contrast to other fee based programs, Rep-as-PM advisors have full discretion to make changes and adjustments to asset allocations and investment managers without first obtaining the express authorization of their clients.
A common feature of Rep-as-PM programs is a scalable technology infrastructure that offers advisors flexibility in creating portfolios and performing other common tasks. Firm Discretionary programs, which include Unified Managed Accounts7 or Home Office Models8, limit advisors to funds on firm-approved or recommended lists. We have seen these trends often with newer products and strategies as these advisors were the early adopters of ETFs as well as liquid alternative mutual funds.
While SRI/ESG growth has been impressive—at roughly 2.2% of mutual funds’ assets—overall penetration into asset allocation strategies is still very small. As such, targeting Rep-as-PM advisors effectively can optimize any sort of SRI/ESG sales campaign. The open architecture Rep-as-PM advisor space, in particular, offers wholesalers an opportunity to expand their advisor relationships and build new ones. To make the most impact, it is critical to approach advisors with as much knowledge about their investing patterns as possible. Using distribution analytics to understand the drivers behind advisors’ use of SRI/ESG products is an important first step for a successful engagement with financial advisors.
1BNY Mellon Intermediary Analytics data, as of March 31, 2019.
2BNY Mellon Intermediary Analytics data, as of March 31, 2019.
3BNY Mellon Intermediary Analytics data, as of March 31, 2019.
4Rep-as-Portfolio Manager (Rep-as-PM) – Advisors have full discretion over all asset allocation decisions.
5BNY Mellon Intermediary Analytics data, as of March 31, 2019.
6Rep-as-Advisor – Advisors need consent from their clients before any sort of changes to an asset allocation.
7Unified Managed Account (UMA) – Includes multiple types of investments all in a single account. Investments may include mutual funds, stocks, bonds and ETFs. Many UMA programs are restricted to approved or recommended funds determined by the broker dealer.
8Home Office Model programs – Asset allocation strategies set by the broker dealer utilizing an approved or recommended list of funds.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used as a generic term to reference the corporation as a whole and/or its various subsidiaries generally. This material and any products and services may be issued or provided under various brand names in various countries by duly authorised and regulated subsidiaries, affiliates, and joint ventures of BNY Mellon, which may include any of the following. The Bank of New York Mellon, at 240 Greenwich Street, NY, NY 10286 USA, a banking corporation organised pursuant to the laws of the State of New York, and operating in England through its branch at One Canada Square, London E14 5AL, registered in England and Wales with numbers FC005522 and BR000818. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the US Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon, London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, a Belgian public limited liability company, with company number 0806.743.159, whose registered office is at 46 Rue Montoyerstraat, B-1000 Brussels, authorised and regulated as a significant credit institution by the European Central Bank (ECB), under the prudential supervision of the National Bank of Belgium (NBB) and under the supervision of the Belgian Financial Services and Markets Authority (FSMA) for conduct of business rules, a subsidiary of The Bank of New York Mellon, and operating in England through its branch at 160 Queen Victoria Street, London EC4V 4LA, registered in England and Wales with numbers FC029379 and BR014361. The Bank of New York Mellon SA/NV (London Branch) is authorised by the ECB and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, operating in Ireland through its branch at Riverside 2, Sir John Rogerson’s Quay, Grand Canal Dock, Dublin 2, D02 KV60, Ireland, trading as The Bank of New York Mellon SA/NV, Dublin Branch, which is authorized by the ECB, regulated by the Central Bank of Ireland for conduct of business rules and registered with the Companies Registration Office in Ireland No. 907126 & with VAT No. IE 9578054E. The Bank of New York Mellon SA/NV, operating in Frankfurt am Main through its branch at MesseTurm, Friedrich-Ebert-Anlage 49, 60327 Frankfurt am Main, trading as The Bank of New York Mellon SA/NV, Asset Servicing branch Frankfurt am Main, which is authorized and supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) as well as regulated by Bundesbank and is registered with the Companies Registration Office of the Amtsgericht Frankfurt am Main with the company number HRB 87912. The Bank of New York Mellon (International) Limited is registered in England & Wales with Company No. 03236121 with its Registered Office at One Canada Square, London E14 5AL. The Bank of New York Mellon (International) Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. If this material is distributed in or from, the Dubai International Financial Centre (DIFC), it is communicated by The Bank of New York Mellon, DIFC Branch, (the “DIFC Branch”) on behalf of BNY Mellon (as defined above). This material is intended for Professional Clients and Market Counterparties only and no other person should act upon it. The DIFC Branch is regulated by the DFSA and is located at DIFC, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE.
BNY Mellon also includes The Bank of New York Mellon which has various subsidiaries, affiliates, branches and representative offices in the Asia-Pacific Region which are subject to regulation by the relevant local regulator in that jurisdiction. Details about the extent of our regulation and applicable regulators in the Asia-Pacific Region are available from us on request. Not all products and services are offered in all countries. In Asia-Pacific, The Bank of New York Mellon, Singapore Branch is subject to regulation by the Monetary Authority of Singapore. The Bank of New York Mellon, Hong Kong Branch is subject to regulation by the Hong Kong Monetary Authority and the Securities & Futures Commission of Hong Kong. BNY Mellon in Australia is subject to regulation by the
Australian Prudential Regulation Authority and is exempt from holding an Australian Financial Services License and is regulated by the New York State Department of Financial Services under the New York Banking Law which is different from Australian law. This document is issued or distributed in Australia by The Bank of New York Mellon, on behalf of BNY Mellon Australia Pty Ltd (ACN 113 947 309) located at Level 2, 1 Bligh Street, Sydney NSW 2000, and relates to products and services of BNY Mellon Australia Pty Ltd or one of its subsidiaries. BNY Mellon Australia Pty Ltd is ultimately wholly owned by The Bank of New York Mellon Corporation. The Bank of New York Mellon does not provide this product or service. None of BNY Mellon Australia Pty Ltd or its subsidiaries is an authorized deposit-taking institution and the obligations of BNY Mellon Australia Pty Ltd or its subsidiaries do not represent investments, deposits or other liabilities of The Bank of New York Mellon. Neither The Bank of New York Mellon nor any of its related entities stands behind or guarantees obligations of BNY Mellon Australia Pty Ltd.
The material contained in this document, which may be considered advertising, is for general information and reference purposes only and is not intended to provide legal, tax, accounting, investment, financial or other professional advice on any matter, and is not to be used as such. The contents may not be comprehensive or up-to-date, and BNY Mellon will not be responsible for updating any information contained within this document. If distributed in the UK or EMEA, this document is a financial promotion. This document and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. Similarly, this document may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorised, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this document comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this document in their jurisdiction. The information contained in this document is for use by wholesale clients only and is not to be relied upon by retail clients. Trademarks, service marks and logos belong to their respective owners.
BNY Mellon assumes no liability whatsoever for any action taken in reliance on the information contained in this material, or for direct or indirect damages or losses resulting from use of this material, its content, or services. Any unauthorised use of material contained herein is at the user’s own risk. Reproduction, distribution, republication and retransmission of material contained herein is prohibited without the prior consent of BNY Mellon.
© 2019 The Bank of New York Mellon Corporation. All rights reserved.