Not all ESG funds are the same
We all know that there has been a seemingly never-ending avalanche of investment funds that fall into the wide ESG, sustainable, impact, climate, renewable etc. bracket launched in recent years.
It’s a broad church.
There are so many variations on this theme in the market place. Some are successors to what were originally labelled Ethical funds. Many fly a full ESG flag. Some highlight UN sustainable goals. Some funds focus on climate, while others just admit to being climate-aware or focus on green or blue strategies.
Technically, both ESG and sustainability are concerned with environmental, social, and governance factors. ESG focuses on evaluating the performance of companies based on these factors, while sustainability is a broader principle that encompasses responsible and ethical business practices in a holistic manner.
So, many funds, with many definitions of how they invest.
However maybe it’s time to take stock.
What’s happened to activity in this sector?
It can be difficult to get robust data, given the broad aspect of the classification. But according to Morningstar, global ESG fund launches have slumped to a 5-year low.
In the first quarter of this year, closures of ESG funds outpaced launches. And in that first quarter, the number of fund launches was half what it was in the same period a year ago. Research from Barclays also points to the first year of ESG outflows across all main regions.
Are investors still interested in ESG?
Research from the Financial Times pointed to 83% of financial advisors saying investor interest in ESG funds has waned.
A recent Citywire survey of fund managers confirmed this trend, showing that the percentage of clients expressing interest in sustainable funds had declined in the past 12 months. When asked: ‘How much of overall assets are now invested in an ESG approach?’ 13% said ‘more than 75%’, which was down from 33% two years ago.
And this is totally separate from the anti-ESG backlash we have seen in the US in states such as Texas and Tennessee.
We may also see a different progression between retail and “institutional” funds (such as pension funds), as regulation and public policy drive investment into ESG type strategies for many large “institutional” portfolios. In this institutional space, requirements for evidence-based disclosure and documented consideration of sustainable issues, will copper-fasten the move to such strategies for years to come.
Importantly, how have these funds performed?
Again getting data can be problematic. It can hard to compare funds on a like for like basis. I looked at a number of global equity funds, marketed here in Ireland, which fall under the broad ESG/Sustainable umbrella. Comparing performance over the last 12 months, we can see quite significant performance differences. In that period the difference between best and worst was close to 12%, for funds with a similar geographic mandate.
ESG investing can be a more complex issue than we might think.
It’s relatively early days in this space, and we may need the dust to settle. But it may be a while before we get to robust “performance discovery”.
Tradewinds 