Managed fund performance

While there has been an increasing investor focus on ESG investing in recent years, there is not currently a weight of evidence to suggest better investment returns should be expected. Different studies find evidence of outperformance, underperformance, and no difference in performance, of ESG mutual funds and ETFs depending on the sample and period considered.

Conclusion

Whether ESG investing is “just like another stock bubble” or “the outperformance of ESG strategies is beyond doubt” remains open to interpretation.

To date, the mainstream studies into ESG risk premia and expected returns, include findings supporting both sides of this debate. However, as ESG investing continues to move from infancy to adulthood, the weight of this evidence might settle more clearly on one side.

Considering the current evidence in aggregate, we find it difficult, from a theoretical perspective, to support the view that companies with positive ESG characteristics will continue to outperform other companies over the long run.

However, this does not imply these companies should not be invested in. There is growing evidence that a greater ESG focus can improve company value even if that may not equate to superior returns to investors.

For example, Climent and Soriano (2011) showed that ‘green’ mutual funds underperformed ‘non-green’ funds in the 1987–2009 period, but there was no difference in performance the 2001–2009 period.

As ESG returns data continues to grow, we expect a clearer signal to emerge. But for now at least, the jury is still out.

Many investors are already in agreement that seeking to maximise investment returns is only one potential goal amongst many and, for some, not the most important one.

In a world grappling with global warming, beset with scarcity issues, and awash with geopolitical and other tensions, businesses that embody greater consideration of stakeholders, society and the environment are to be celebrated.

And, regardless of the investment thesis behind it, many investors are currently doing just that.

Where’s the evidence...? is a series of articles produced by the Consilium Investment Team that draws on a regular review of current academic literature provided by Professor Ben Marshall, Consilium’s Independent Academic Consultant.

www.consilium.co.nz support@consilium.co.nz

+64 3 353 1007