With the rise of ESG investment funds in recent years, the question of whether they perform better or worse than standard passive funds has been the subject of much speculation and debate.
A new Morningstar report has sought to address the issues and the good news is that despite relatively limited data as this is a fairly new phenomenon, ESG funds on average do not underperform standard funds.
Report author and manager of manager research, Tim Murphy said The fifth state the important point to remember for fund managers was that it is possible to build a portfolio that aligns with clients’ ESG values, without sacrificing returns.
“I would say that with any community of investors, you expect ESG funds, certainly in the long term, to underperform because you reduce your opportunities,” said Murphy.
“What we wanted to do was just test this empirically, and obviously there is a range of approaches, but the average conclusion was that they weren’t better, but not worse either.”
Morninhstar’s research focused on Australia-domiciled global equity funds, which contained the largest sample of ESG funds available to Australian investors and offered the broadest possible investment universe of any class of investment. ‘assets.
Of 33 such funds in Australia, only 19 had a three-year history to compare and only 14 had a five-year history.
A five-year risk / reward comparison showed that none of the funds fell in the most desirable upper left quadrant of higher return with lower risk, “where every investor aims to be.”
However, in the past three years, seven funds achieved higher returns with lower risk than the MSCI index, six funds had higher returns with higher risk, four funds produced lower returns with lower risk and only two funds had lower returns and higher risk.
While ESG funds have a reputation for being less risky, based on average performance over the past few years, they were no less risky than traditional investments, including in fossil fuels.
He clarified that this was only a reflection of past performance, which over the past 18 months had been mixed.
“Certainly in 2020 many types of investments favored by ESG have worked quite well, but this year the reverse is true. For example, we are seeing record coal prices right now, ”he said.
Regarding the long-term risk for investments in industries such as fossil fuels, Murphy explained that the report was not judgmental one way or the other. “We were only looking to determine the risk level of the performance profile of these funds to date,” he said.
The Australian Prudential Regulatory Authority, however, is developing guidelines for institutions and fund managers directly focused on managing the future risk of climate change for investments.
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He added that one of the objectives of the document was to highlight the range of different approaches to ESG investing that fell into the same basket and the trap that faced potential investors.
“If you have 20 funds that all say ‘we are an XYZ sustainable global equity fund’ on the cover, obviously, under the hood there is a wide range of different approaches and different ways of defining and doing things. “, did he declare.
While there are stricter regulations on what can constitute an ESG fund in Europe and plans for better consistency around the world, Murphy said it will remain important for investors to look beyond the label. and apply their own ESG values by choosing where to invest their money. .