1ST writing assignment

Executive Summary:

This essay analyzes the current status and development of ESG Fund using BlackRock ETF Fund data. The analysis explores three aspects which include current assets value, growing trend and profitability of ESG fund and also make comparison with regular fund in the data set. Based on the analysis, the conclusion reaches to a recommendation of investing in ESG fund.

Introduction

The year 2022 impresses us as never before as we experience more impacts from climate change. It was one of the hottest years in global weather records. We have seen international gatherings of global conventions that have increased our awareness of the need to focus on the health of the planet and find greener alternatives, and investments in the planet’s resources and environment have become a global focus for sustainable investment and financing. Nowadays, visionary investors recognize that a secure, stable world is necessarily the foundation for growth and sustainability. In essence, therefore, ESG investing means abandoning the “quick profit”. This article is divided into three arguments to demonstrate the feasibility of investing in ESG funds from the perspective of its current status, scale, profitability as well as its comparison with regular funds.

Argument 1

ESG funds have relatively high credit rankings and still have a lot of potential for expansion compared to traditional funds in terms of their asset values. From the first graph, it can be told that ESG funds are mostly composed of high rated funds. For example, AAA rated ESG funds have a total assets value over 40000 million dollars and occupies the majority of the fund composition. In contrast, the rating of regular funds covers from AAA to B and AA takes the largest share. In terms of its future development, according to the data, only 3% of BlackRock etf is esg fund. Right now, there are 2,119,131 million USD in regular fund, while ESG fund has less than 70,000 million USD. Therefore, the percentage is expected to continue to rise in the future given the importance of ESG integration into investment decisions.

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library(ggplot2)

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# Create a new variable to only include ESG fund
blackrock_etf_data <- blackrock_etf_data %>%
  mutate(category = ifelse(is_esg == "ESG Fund", "ESG Fund", "Regular Fund"))

# Summarize total assets by category and sustainability rating
esg_totals <- blackrock_etf_data %>%
  filter(category == "ESG Fund") %>%
  group_by(category, sustainability_characteristics_msci_esg_fund_ratings_msci_esg_fund_rating_aaa_ccc) %>%
  summarize(total_assets = sum(net_assets_usd_mn))

esg_totals$sustainability_characteristics_msci_esg_fund_ratings_msci_esg_fund_rating_aaa_ccc <- 
  factor(esg_totals$sustainability_characteristics_msci_esg_fund_ratings_msci_esg_fund_rating_aaa_ccc, 
         levels = c("AAA", "AA", "A", "BBB", "BB", "B", "NA"))

# Create a stacked column graph
ggplot(esg_totals, aes(x = sustainability_characteristics_msci_esg_fund_ratings_msci_esg_fund_rating_aaa_ccc, y = total_assets, fill = category)) +
  geom_col(position = "dodge") +
  ylim(0,50000)+
  scale_fill_manual(values = c("#b2c2cf")) +
  labs(title = "Total Assets of ESG Fund by Credit Rating", x = "Sustainability Rating", y = "Net Assets (in millions of USD)", fill = "") +
  theme_bw() +
  theme(panel.grid = element_blank(), legend.position = "bottom") +
  guides(fill = guide_legend(nrow = 1, title = "Category", label = TRUE, label.position = "bottom", label.hjust = 0.5)) +
  geom_text(aes(label = paste0("$", total_assets)), position = position_dodge(width = 0.9), vjust = -0.5)

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# Group all of the regular fund to show the percentage of its value against esg fund
blackrock_etf_data <- blackrock_etf_data %>%
  mutate(Category = ifelse(is_esg == "ESG Fund", "ESG Fund", "Regular Fund"))

total_assets <- blackrock_etf_data %>%
  group_by(Category) %>%
  summarize(Total_Assets = sum(net_assets_usd_mn))

# Show percentage of ESG and regular funds
total_assets <- total_assets %>%
  mutate(Percent = scales::percent(Total_Assets/sum(Total_Assets)))

# Plot a pie chart
ggplot(total_assets, aes(x = "", y = Total_Assets, fill = Category)) +
  geom_bar(width = 1, stat = "identity") +
  coord_polar(theta = "y") +
  theme_void() +
  scale_fill_manual(values = c("#B2C2CF","#7E8995")) +
  geom_text(aes(label = Percent), position = position_stack(vjust = 0.5))

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#filter the data to only show regular fund
regular_funds <- blackrock_etf_data %>% filter(is_esg == "Regular Fund")
# group data by ratings
regular_rating_assets <- regular_funds %>% 
  group_by(sustainability_characteristics_msci_esg_fund_ratings_msci_esg_fund_rating_aaa_ccc) %>% 
  summarize(Total_Assets = sum(net_assets_usd_mn))
  regular_rating_assets$sustainability_characteristics_msci_esg_fund_ratings_msci_esg_fund_rating_aaa_ccc <- 
  factor(regular_rating_assets$sustainability_characteristics_msci_esg_fund_ratings_msci_esg_fund_rating_aaa_ccc, 
         levels = c("AAA", "AA", "A", "BBB", "BB", "B", "NA"))


#plot a column graph to show ratings 
ggplot(regular_rating_assets, aes(x = sustainability_characteristics_msci_esg_fund_ratings_msci_esg_fund_rating_aaa_ccc, y = Total_Assets)) +
  geom_col(fill = "#7e8995") +
  scale_y_continuous(labels = scales::comma) +
  labs(title = "Total Assets of Regular Fund by Credit Rating", x = "Credit Rating", y = "Total Assets (USD Mn)") +
  theme_bw()

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#Calculate the total assets value of regular funds
regular_total <- total_assets$Total_Assets[total_assets$Category == "Regular Fund"]
cat("Total value of Regular Fund: ", round(regular_total, 2), " million USD\n")

Total value of Regular Fund:  2119131  million USD

Argument 2

Started from 2005, there is a growing trend that more and more ESG funds have been launched, especially in the year of 2020. ESG investments have become an important part of the asset management industry. Although global green bonds were briefly out of favor in 2022 due to a bear market in U.S. stocks, aggressive rate hikes by the European Central Bank and the Federal Reserve, and global economic uncertainty, global green bond issuance is expected to rebound in 2023 amid a better-than-expected world economy, stronger support for the green economy, and a more certain interest rate environment. In addition, many countries have increased their regulation of ESG products, especially in the fight against “greenwashing”. Investors’ returns will be more secure in the future.

Argument 3

ESG fund costs much less than regular fund using net expense ratio as an example. The net expense ratio measured the fees charged to the fund after any reimbursements, trading costs and brokerage commissions have been made. It is an actual payment as a percentage of assets under management. From the histogram, it can be observed that majorities of ESG fund have a net expense ratio around 0.1, while many regular funds have that of over 0.5. A lower net expense ratio would save investors more money and retain any profits distributed to asset managers and investors.

“Show the code”

# Filter data to include both ESG and Regular Funds
blackrock_etf_data_filtered <- blackrock_etf_data %>%
  filter(is_esg %in% c("ESG Fund", "Regular Fund"))

# Create a histogram of net expense ratios, faceted by fund category
ggplot(blackrock_etf_data_filtered, aes(x = net_expense_ratio_percent, fill = is_esg)) +
  geom_histogram(binwidth = 0.05, position = "dodge") +
    scale_fill_manual(values = c("#b2c2cf", "#7e8995")) +

  facet_grid(~ is_esg) +
  labs(title = "Distribution of Net Expense Ratios by Fund Category", x = "Net Expense Ratio", y = "Frequency", fill = "Fund Category") +
theme_bw() + theme( strip.background  = element_blank(),
                    panel.grid.major = element_line(colour = "grey80"),
                    panel.border = element_blank(),
                    axis.ticks = element_blank(),
                    panel.grid.minor.x=element_blank(),
                    panel.grid.major.x=element_blank() ) +
theme(legend.position="bottom") 

Conclusion

In conclusion, ESG fund market size has greater potential to grow, the overall quality is better than regular funds, and the expense cost is less. It is believed that ESG funds will be favored by more investors in the future with further improvements in regulation. Therefore, through the above analysis, investing in ESG funds is profitable and highly recommended.