Checking the analysis: do ESG investments improve financial performance? Who's right?
Photo credits: Odd socks, Unsplash / Michael Wright
One of the industry's fastest-growing trends is the increase in environmental, social, and governance (ESG)-themed funds. New products are launching regularly and inflows are streaming into these ESG products as many investors are moving to align their money towards their ethical priorities.governance (ESG)-themed funds. New products are launching regularly and inflows are streaming into these ESG products as many investors are moving to align their money towards their ethical priorities.
As at 30 June 2021, assets in Australian Sustainable Investments were at A$33.42b, up 66% from a year earlier, according to Morningstar's Sustainable Investing Landscape for Australia Fund Investors report for Q2 2021.
But what about performance? Most investors are unlikely to sacrifice returns - that's right, isn't it?
Since ESG funds have risen so rapidly recently, it's can be difficult to assess whether these funds have delivered better returns. And, because fund managers use a variety of investment methodologies, combined with different and non-standardised metrics to define ESG, investors can have a difficult time sorting which fund delivers an ESG proposition worth considering. It can get even more confusing when fund managers and analysts have very different opinions!
So who's right?
Morningstar's October 2021* analysis of ESG investments has concluded that so far, over 5 years
"the evidence is inconclusive that Australian domiciled global ESG funds can improve returns or reduce risk, on average,
but equally ,there is no evidence to suggest that ESG makes these features worse
however
over three years, the outcomes for ESG funds have improved .... “
To date only 19 of 33 funds analysed have 3 year's data and 14 of 33 funds have 5 years' data ( comparator : broad MSCI World ex Australia Index.)
The RIAA** September 2021 Benchmark Report has reported that
responsible investment funds (both Australian multi -sector and International large blend) have on average mostly out-performed or had similar returns to non ESG funds, over the longer term ( 5-10 years)
The RIAA research was based on
59/198 survey responses by investment managers and
KPMG desktop research into the remaining 139 using publicly available data.
What accounts for the difference?
Timelines : Financial performance was assessed over different time periods
Comparators : Each report used different comparators to assess fund performance ( eg MSCI ex Australia Index vs Morningstar Australia fund multi-sector growth )
Methodology: Each used different sources of data eg self -reports v public data v analyst reports- these are not directly comparable
What counts as ESG? : These measures can be differnet, and are certainly not stndardised across the industry
Which Fund ? : There was a large difference in the number of funds analysed - Morningstar 33 funds v RIAA 198 Funds
Does it matter ?
Both reports indicate that ESG funds have financial returns which are similar to standard investments, and may do better longer-term. Nevertheless, many people are looking for super and investments performance which is
similar to that of standards fund, and importantly
based on sustainable returns and responsible undertakings by companies
FUND OUTPERFORMANCE IS NOT NECESSARILY THE MAIN ISSUE!
* Murphy,T. Morningstar Manager Research 1 October 2021
** Responsible Investment Association Australasia 2021 BenchMark Report
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