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ESG Funds Beat Non-Sustainable Sister Funds

Investors concerned ESG investing means compromising on returns are proved wrong as research shows many ESG funds beat their non-sustainable counterparts

Annalisa Esposito 24 September, 2019 | 3:21PM

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Investors would do better to pick ESG funds rather than their non-sustainable counterparts, according to research by fund supermarket interactive investor.

Morningstar data analysed by the firm reveals that funds taking environmental, social and governance (ESG) factors into account in their investments have performed better than their non-ESG sister funds.

The figures put paid to the concerns many investors have that investing sustainably means compromising on returns. Indeed, in five of the six fund duos analysed by interactive investor, the ethical offering outperformed over one and three years.

The 7IM Sustainable Balance fund, for example, delivered a return of 4.5% over the past year, some fifteen times greater than the 0.3% return produced by the 7IM Balanced fund. Both are fund of funds, meaning they invest in other funds rather than directly into bonds and equities themselves. While the Sustainable Balance fund has Threadneedle UK Social Bond and Greencoat UK Wind among its top holdings, its non-sustainable sister holds Majedie UK Focus and Man GLG Japan CoreAlpha.  

Moira O’Neill, head of personal finance at interactive investor, says: “The data provides further evidence that you don’t have to compromise returns to invest ethically. In many cases, ethical funds have a solid track record of outperforming similar funds run by the same investment house, but without the ethical remit.”

Indeed, recent research by Morningstar found 41 of the 56 (73%) Morningstar’s ESG indexes have outperformed their non-ESG equivalents since their inception.

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The five-star rated Rathbone Ethical Bond fund is another fund whose performance has outstripped its non-ESG counterpart, delivering a return of 8.1% over the past year, more than double that achived by the Rathbone Strategic Bond.

The Ethical offering avoids bond issuers involved in arms, animal testing, tobacco, nuclear power and alcohol, among other areas. The fund uses so-called double screening, and each of its 200-plus holdings must also include at least one positive ESG criteria. Some two-thirds of the portfolio is in banks and insurance company bonds including those issued by FTSE giants HSBC and Lloyds.

The three-star rated Sarasin Responsible Global Equity fund has also outperformed its peer, returning 9.8% over the past year compared to 5.7% from the Sarasin Thematic Global Equity fund. The former invests in stocks across the world, tapping into enduring mega-trends such as digitisation, automation, climate change, ageing and evolving consumption. More than half its portfolio is in US firms including payments giant Mastercard and toothpaste-market Colgate-Palmolive.

The Neutral-Rated Kames Sterling Corporate Bond is the only fund in the list that has beaten its ethical peer, the Neutral-Rated Kames Ethical Corporate Bond. Over the past year the pair have returned 8.2% and 7.8% respectively.

As ESG factors become more important to many investors, the figures provide a stark reminder that investing sustainably does not necessarily mean compromising on returns. The same is also true on the stock market, where many ethical companies have thrived in recent years – a recent example is vegan-burger maker Beyond Meat, whose shares soared 800% after it listed on the stock exchange.

Ben Yearsley, director at Shore Financial Planning, says: "Every fund you consider for investment should be compared to other funds doing a similar thing to determine how well the manager and his strategy has done. ESG funds are no different - there are good ones and bad ones, and investors need to do their homework." 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk

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