
Jury still out on ESG global equity funds
Not even one of the 14 ESG global equity funds available to Australian investors five years ago has been able to deliver a higher return with lower risk than the broad market index.
That is the pragmatic assessment of research and ratings house Morningstar in a new analysis which questions whether ESG investments improve performance and concludes that it is still too early to conclude that global equity ESG funds can improve returns or reduce risk.
According to Morningstar Direct data shows there are 33 Australian-domiciled large-cap global equity funds with unique investment strategies that are tagged as sustainable investment funds. Only 19 of the 33 funds have a three-year track record, while just 14 of the 33 funds have a five-year track record as of 31 August 2021, which demonstrates how recent the growth in ESG funds is.
Applying its methodology, Morningstar said that the empirical evidence showed that not a single one of the 14 ESG global equity funds available to Australian investors five years ago had been able to deliver a higher return with lower risk than the board market index.
“Five funds (plus the Morningstar Global Markets Sustainability NR Index) have delivered lower return with lower risk over this period, five funds have achieved higher returns with higher risk, while four funds have delivered the double-whammy outcome of lower returns with higher risk than the index,” the analysis said.
“Overall, this isn’t a bad outcome, but nor is it a compelling investment outcome over this period,” Morningstar said while noting that results are more encouraging when looking at the same risk/reward analysis over the shorter three-year period.
It noted that seven funds (plus the Morningstar Global Markets Sustainability NR Index) achieved higher returns with lower risk than the MSCI Index, six funds had higher returns with higher risk, four funds delivered lower returns with lower risk, while just two funds had lower returns and higher risk.
“What then is behind the recently improved outcomes for ESG funds? Are the funds that have launched in recent years been higher quality? Or has there been a structural move in markets that have helped ESG funds?”
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