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Sustainable funds performance

Do sustainable funds outperform the wider market?

A common objection to sustainable investing is the belief it can mean sacrificing returns. This widely-held perception has been a barrier to the growth of ESG investing. Indeed, research from Square Mile shows how important returns are to clients. Advisers who participated in their ESG survey indicated clients would not be willing to compromise on performance, with 82% stating that less than 25% of their client base would be willing to do so1.

In fact, Fidelity analysis of funds within the Investment Association UK All Companies and Global sectors shows the opposite to be true. Funds with an ESG focus have tended to outperform those that do not – over both shorter and longer-term periods. This is illustrated in the charts below, although the very strong performance of ESG funds in 2020 will have influenced the longer-term figures.

The value of investments and the income from them can go down as well as up so the client may get back less than they invest.

12 month rolling returns % Mar 16 - Mar 17 Mar 17 - Mar 18 Mar 18 - Mar 19 Mar 19 - Mar 20 Mar 20 - Mar 21
ESG Funds (Global sector) 31.16% 10.36% 3.63% 11.14% 25.80%
Non-ESG Funds (Global sector) 32.53% 8.92% 2.36% 6.71% 22.55%
MSCI ACWI 36.71% 7.29% 2.72% 8.18% 19%

Past performance is not a guide to future returns. The value of investments can go down as well as up and clients may get back less than they invest.

12 month rolling returns % Mar 16 - Mar 17 Mar 17 - Mar 18 Mar 18 - Mar 19 Mar 19 - Mar 20 Mar 20 - Mar 21
ESG Funds (UK All Companies sector) 17.21% 7.92% 0.68% 6.73% 7.54%
Non-ESG Funds (UK All Companies sector) 19.4% 7.05% -0.99% 1.15% 8.56%
MSCI ACWI 22.81% 4.4% 1.7% -1.43% 3.5%

Past performance is not a guide to future returns. The value of investments can go down as well as up and clients may get back less than they invest. Changes in currency exchange rates may affect the value of an investment in overseas markets.

Source: Fidelity Interational 9 March 2021

Considering risk as well as reward

While the figures above may go some way to addressing client concerns over the performance potential of sustainable funds, returns should always be viewed in the context of risk.

Some commentators argue that ESG funds are inherently riskier – certainly compared to a broad-based market benchmark – because they may exclude large index constituents such as oil and mining stocks. The argument is that they are less diversified. 

On the other hand, proponents of sustainable investing maintain that ESG strategies carry less risk. This is because ESG risks can have a significant impact on a company’s performance and so should be accounted for in the stock selection process. There were some high-profile examples of companies that were impacted last year because of negative publicity over working practices or other ESG-related factors.

ESG stocks outperform over the Covid crisis

Fidelity research conducted over the first three quarters of 2020 found there is a strong correlation between a company’s performance and its ESG rating.

Sustainable Investment Finder

Our tool is designed to make the process of selecting sustainable funds easier. Take a look at how it could help to identify potential fund solutions, whatever a client’s sustainable outlook may be.

The level of risk invariably differs from fund to fund. It is therefore important to check that the risk profile of a sustainably-managed fund is in line with the risk profile of any given client as part of the due diligence process. A fund’s Morningstar rating, for example, is shown within the Investment Finder tool – the rating is a measure of a fund’s risk-adjusted return compared to similar funds. Analysis of a fund’s holdings can also be conducted to ensure it is sufficiently diversified.

Investors value a company by discounting its future cash flows or assigning a valuation multiple to its ability to generate cash in the future. A company that does not focus on sustainability issues, whether E, S or G, will face the risk of a structural decline in its future cash flows, resulting in value destruction.

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Your guide to sustainable investing

Which factors do fund managers take into account when investing responsibly? What different investment approaches are there and do managers adhere to certain standards?

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Sustainable investing glossary

A common issue cited with sustainable investing is a lack of clarity over the language used. Our glossary defines some of the more frequently used terms in this field of investment.

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Sustainable investing and the advice process

Clients increasingly want to match their money with their morals. Taking account of their ESG preferences within the factfinding process is therefore good practice.

Fund Partner insights

In praise of choice

Choice is generally considered a good thing. In asset management, as well as reducing the risk of bubbles, it also helps advisers to better match their clients’ values and principles.

Fidelity research finds link between ESG and dividend growth

Utilising Fidelity’s Sustainability Ratings, we recently analysed the relationship between sustainability and dividend payments to shareholders.

Cows, methane and the climate threat

Fidelity’s portfolio managers and analysts discuss a number of pioneering new methods to avoid or reduce emissions from livestock, and how these are appealing to investors focused on sustainability.

Source:

1 - Square Mile Investment Consulting and Research Ltd, ESG survey April 2020.