Ethical investments are outperforming traditional funds
For intermediaries only
Environmentalists cheered by huge improvements in air quality during the lockdown – and the collapse in coal power generation – have another reason to celebrate. Even the stock market has gone in their favour.
A detailed number-crunching of environmentally sustainable funds has revealed that they have outperformed traditional funds across the board – beating them during the pandemic as well as during the 10 years up to and including the coronavirus sell-off.
The data, from the global research agency Morningstar, comes amid growing evidence that environmentally focused investing – once pigeonholed by City traditionalists as only for a vegan/hippy minority – is becoming mainstream. This week, Vanguard, one of the world’s biggest fund managers, launched two ethical index funds aimed at UK investors, while Aviva, Britain’s biggest insurer, unveiled a “climate transition” fund.
Morningstar examined 745 sustainable funds and compared them against 4,150 traditional funds, and found they matched or beat returns in all categories – whether bonds or shares, UK or abroad.
“Average returns and success rates for sustainable funds suggest that there is no performance trade-off associated with sustainable funds. In fact, a majority of sustainable funds have outperformed their traditional peers over multiple time horizons,” it says.
Over 10 years, the average annual return for a sustainable fund invested in large global companies has been 6.9% a year, while a traditionally invested fund has made 6.3% a year.
The outperformance continued during the coronavirus crisis. “In all but one category considered in the study, sustainable funds outperformed, with average excess returns in Q12020 ranging between 0.09% and 1.83% across categories,” Morningstar says.
One reason may be that many US tech stocks, popular among environmental investors, have soared during the crisis, while shares in oil, gas and coal companies have plummeted. The Nasdaq index of US tech stocks has recovered completely from the coronavirus crisis, reaching new highs this week, while the oil giant ExxonMobil is trading at $53 compared with $70 before the lockdown.
The Morningstar researchers noted that sustainable funds are longer-lasting than their peers. One of the tricks of the asset management industry is that funds that do badly are quietly removed – usually by merging them with another, better-performing fund. This has the effect of flattering the overall performance figures, suggesting that investors are doing better over the longer term than they really are. Morningstar found that three-quarters of sustainable funds lasted 10 years or more, compared with less than half of traditional funds.
Campaigners welcomed the confirmation that sustainable funds are better. Michael Kind of ShareAction – a charity and company that promotes responsible investment – says: “It’s very positive, but also not surprising, to see that funds with robust environmental, social and governance (ESG) strategies are overall better performers financially. We hear from savers very often that one of the biggest barriers to action is that there is a perception that you will lose out financially if you switch to investing responsibly.
“But is this enough? No … we would expect more ambitious and authentic ESG funds to deliver better outcomes for stakeholders and the environment but not inevitably to deliver investors more money every time.”
ShareAction’s checklist for making your money more socially responsible
Research what funds your pension/Isa/investment provider offers you.
Look into the holdings and stewardship/investment policies of your funds, or those you are considering putting money in. These policies show how your asset manager will invest your money and try to influence companies on your behalf. You can either do this on your own or ask your investment (or pension) provider/employer/financial adviser for this information.
It is important to see how your investment provider votes at the world’s largest companies’ AGMs. Are they voting for climate action and supporting human rights?
ShareAction recently produced an independent global ranking of the most responsible asset managers across many topics. Use it to make an informed decision when selecting a manager.