ESG Funds' Top Holdings: A Surprising Look at Tech and Sustainability in Investing

As ESG (Environmental, Social, and Governance) funds continue to gain prominence, their top holdings are becoming increasingly familiar. These funds, which take into account a company's environmental, social, and governance factors, are still focused on investing in top performers across various industry groups.

Familiar Holdings

According to DWS Group's Arne Noack, the goal of these funds is not to be overly concentrated in a select few stocks based on ESG or climate principles. Instead, the aim is to maintain a portfolio that closely mirrors the economic composition of the US economy. Noack, the head of systematic investment solutions for the Americas, emphasized that the Xtrackers MSCI USA Climate Action Equity ETF (USCA) managed by his firm includes familiar names such as Nvidia, Amazon, Microsoft, Apple, Meta Platforms, and Google's parent company Alphabet as its top holdings. These companies are among the leading mega-cap tech stocks and are also dominant in ETFs tracking the S&P 500.

Technology Dominance

Besides, ESG funds have a substantial investment in technology stocks as the sector is considered one of the "cleaner" industries. Former VettaFi financial futurist Dave Nadig pointed out that a focus on climate often results in minimal holdings in energy, mining, and steel companies and a heavier emphasis on services, health care, and technology. Currently, information technology stocks account for over 30% of USCA's allocation, more than doubling the fund's second-largest sector allocation of 13.5% in health care, as reported on Xtracker's website.

Dispelling Misconceptions

Noack addressed the misconception that ESG funds exclusively invest in clean and sustainable sectors, emphasizing that they are not averse to investing in energy companies. He stressed the vital role of energy in the economy, thereby dispelling the notion that ESG funds are limited to only "clean" investments.

The Relevance of ESG Funds

In the fourth quarter of 2023, global ESG funds experienced their first net quarterly outflows on record, according to Morningstar. Despite this, financial advisors may have reduced their recommendations for ESG funds, but investor interest remains strong. Dave Nadig highlighted that while advisors may have stepped back, individual investor demand has remained consistent. He emphasized that the allure of ESG funds is not based on short-term momentum but rather on a long-term investment approach.