One of the poorest-performing sectors was UK Equity Income, with no ESG funds outperforming the index.
This is the second article in a three-part series. Part one looked at investment trust performance since the Paris Agreement was signed in April 2016, and part three will analyse how exchange-traded funds (ETFs) have fared.
Just over half of ethical funds have outperformed their group benchmarks since the Paris Agreement was signed in April 2016.
With the international meeting of world leaders to address climate change very much in the news, there is a renewed interest in ethical funds that take into account environmental, social and governance (ESG) factors. With the COP26 summit seeing countries around the world commit to getting tough on reducing emissions and investing more in renewable energy, green assets are expected to shine.
Therefore, interactive investor examined the performance of ESG funds between now and the previous big agreement by world leaders to commit to combating climate change – the signing of the Paris Agreement in April 2016. To do this, we looked at the performance of funds in interactive investor’s ethical investment long list between 22 April 2016 and 31 October 2021. This a list of all funds, investment trusts and exchange-traded funds available on the ii platform that have some form of ethical, social or governance bias. For the list, interactive investor works with industry experts at SRI Services to help confirm and classify relevant funds.
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Taken together, the 90 funds have an average performance of 84.7%, according to data supplied by Morningstar. Of course, that figure alone hides a wide range of performance, with some funds on the list, such as Alquity Africa, returning as low as 7.2% and others, such as Baillie Gifford Global Stewardship, returning 242%.
To get a better picture of the relative performance of the funds, we examined how they performed relative to their group benchmark, assigned by Morningstar. It is important to note that these benchmarks are not necessarily the specific chosen benchmark of each fund, but instead the one that Morningstar deems best represents their sector. So, for example, US Large-Cap Growth Equity ESG funds are assigned the Russell 1000 Growth Index as a benchmark, while ESG funds in the UK Equity Income are assigned the FTSE All-Share index.
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In total, 52% of ESG funds outperformed their group benchmark over the period.
In terms of beating the benchmark, all nine funds in the UK Flex-Cap Equity sector outperformed the FTSE All-Share index.
In comparison, of the seven ESG funds in Global Large-Cap Growth Equity, just two outperformed the MSCI ACWI Growth Index. However, while these funds outperformed this benchmark, absolute performance was much higher than for funds in other sectors. Of the seven funds examined, every fund provided a return in excess of 110%.
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One of the poorest-performing sectors was UK Equity Income. Of the five ESG funds in this sector, none outperformed the FTSE All-Share. This can largely be explained by the strong contribution of non-ESG shares in that index, such as energy, mining and tobacco. By excluding these, the performance of the funds is always likely to be hampered relative to the index.
As mentioned, Baillie Gifford Global Stewardship returned 242%, making it the best-performing fund. The second-best performer was Aegon Global Sustainable Eq, with a return of 229%. In third place was Legg Mason CB US Eq Sust Ldrs, with a return of 182.7%. BGF Sustainable Energy was the fourth best, returning 164.1%, while Janus Henderson Global Sust Eq was in fifth place with a return of 161%.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.