Fintech Insights

The $357B question: What are ESG funds?

Tony Warren | EVP head of Strategy and Solutions Management, FIS

September 26, 2022

It’s easy to see that enthusiasm for ESG investing is growing fast. ESG funds held over $357 billion at the end of 2021, more than four times the total from just three years earlier.

And if you ask a group of investors, “What is ESG investing?” or, “What does ESG stand for in investing?” most will know it means investing based on environmental, social and governance factors.

But ask them, “What are ESG funds?” and expect a variety of answers – or no answers at all.

Where’s the disconnect? Is there any progress in defining an ESG fund? And how can fintech firms like FIS help drive the conversation and close those gaps?

Discover the answers in my 90-second podcast.

Does your device need to be on mute? Then you can read the transcript:

According to Morningstar, investors have put over $69 billion into ESG funds in 2021. And this trend has continued to accelerate into 2022. In total, ESG funds held over $357 billion at the end of 2021, more than four times the total from just three years earlier. So, enthusiasm for this space continues to grow.

But the question many investors are asking now is, what is an ESG fund? And that is a much harder question to answer. The SEC indeed has recently put forward a new draft of proposals, disclosing requirements for ESG funds. In a nutshell, they're taking the first crack on transparency and standardization of ESG-specific metrics by requiring additional disclosures and suggesting a format to make things more digestible.

But the proposal is just the first step and it doesn't go far enough yet. There continues to be little guidance on how ESG scores are calculated. So that is still up for wide interpretation and manipulation based on the reported metrics.

The current lack of standardization presents a unique opportunity for us at FIS to step forward as a thought leader in this ESG space.

So, we are developing solutions that take advantage of multiple ESG data sets and providers and leverage AI and machine learning towards addressing the current gaps and coming needs of the ESG analytics and reporting space.