In a year when the climate change crisis was centre stage, a growing army of investors have started to incorporate environmental, social and governance (ESG) factors into their investment decisions. And those who chose sustainable investment fund have been richly rewarded in 2019 with returns of up to 32%, Morningstar data shows.
The returns delivered by the top-performing sustainable funds show that these investors have not had to compromise on returns. With many of these funds really proving their worth, Alexandre Jeanblanc, investment specialist at BNP Paribas, believes that 2020 will be “the year of the environmental revolution”. He says: “There will be no other choice but investing massively to cope with climate change.”
According to Morningstar Direct data, the strongest funds with a sustinable investment mandate have delivered returns of up to 32% year to date. Even the worst performing sustainable funds are in positive territory, with the weakest performing still returning 3.7%. We have looked at the performance of ESG equity funds so far in 2019:
Best Performing ESG Equity Funds
At the top of the pile, the five-star rated Pictet Global Environmental Opportunities fund has delivered a return of 31.8% year to date, benefiting from the growth in sectors including energy efficiency and pollution control. Fund manager Luciano Diana likes software companies such Ansys, Cadence and Synopsys as well as computer chip-maker ASML.
Enviromental monitoring equipment has been a strong theme for the fund too. Holdings tapping into this trend include Thermo Fisher, Agilent and Ecolab. Of course, one downside of the growing attention these companies are getting is that their share prices are now starting to look expensive, but Diana doesn't think this is a problem as long as the companies continue to deliver.
| Name | Morningstar Rating | Morningstar Sustainability | YTD Total Return (%) | Sustainability Percent Rank in Global Category |
| Pictet Global Environmental Opportunities | 5 | High | 31.9 | 7 |
| Schroder Global Cities RE | 4 | Below Average | 29.3 | 77 |
| Pictet Security | 5 | High | 28.4 | 7 |
| Liontrust UK Ethical | 5 | High | 28.3 | 2 |
| Pictet Clean Energy | 4 | High | 27.7 | 1 |
| Robeco Mega Trends | 4 | High | 27.5 | 3 |
| BNP Paribas Climate Impact | 4 | Above Average | 27.3 | 14 |
| Pictet Water | 4 | Average | 26.2 | 47 |
| LO Funds Generation Global | 5 | High | 25.6 | 6 |
| Morgan Stanley US Advantage | 3 | Below Average | 25.5 | 92 |
In the year ahead, Diana thinks sustainable packaging companies, whose share prices are still good value, will outperform: “We have seen the beginning of a new market driven by the substitution of plastic packaging with paper packaging – some of our companies are exposed to that."
Three other Pictet funds also feature in the list of top performers: Pictet Security, Pictet Clean Energy and Pictet Water, have returned 28.4%, 27,7% and 26.2% respectively.
2019 has also been a very strong year for four-star rated Schroder ISF Global Cities Real Estate, which ranks second with a return of 29.3%. The fund back companies that invest in cities, particularly those with strong ESG credentials. Top holdings including self-storage companies such as Big Yellow in the UK and CubeSmart in the US and office operator Alexandria Real Estate Equities.
Co-manager Tom Walker says: “The returns of this fund will be dictated by the pace of urbanisation; we believe this trend is one of the defining trends of the 21st century. Crucially, academics around the world all forecast increasing levels of urbanisation for many decades to come.”
In particular, the US coastal cities and Chinese cities - Shanghai, Beijing and Shenzhen - have seen some of the strongest returns. “These cities are innovations hubs and the modern economy is driven by the monetisation of ideas,” he says. “The network effect in successful cities drives more talent to these locations, in turn this talent makes the city more creative and innovative.
However, the fund is rated “Below Average” in ESG terms by the new Morningstar Sustainability rating alongside Morgan Stanley US Advantage. It's a reminder that ESG-minded investors need to check a fund's strategy aligns with their beliefs, as well as delivering strong performance.
Elsewhere, the Bronze-rated BNP Paribas Climate Impact fund has delivered a return of 27.3%, investing in companies involved in energy efficiency, renewable energy, waste management and water.
BNP Paribas's Jeanblanc says performance has been driven by strong demand in three sectors: the manufacture of devices that lower greenhouse gas (GHG) emissions; water utilities that facilitate the access to water especially in dry areas; and IT companies with a strong focus on diminishing energy consumption. Among the portfolio's strongest holdings are Swedish heating and venitlation firm Nibe and British engineering group Spirax Sarco.
Worst Performing ESG Equity Funds
With political strife and economic turmoil rife, funds focused on emerging markets struggled in 2019 and ESG options were no exception. Some eight of the 10 weakest performing ESG equity funds invest in the region, which spans Asia, the Middle East and Latin America.
Emerging market investments have suffered in recent months as currencies and stocks recorded losses - political tensions in Latin America and failure to resolve the trade situation between the US and China have hurt investor sentiment as well as economic growth.
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The worst-performing ESG equity fund is the Silver-rated Stewart Investors Asia Pacific Leaders fund, which has delivered just 3.7% year to date, some 7.2% lower than its benchmark, the MSCI ASIA Pacific ex Japan.
The fund's portfolio is concentrated, with just 34 companies and more than 10% of assets currently held in cash. Among top holdings, the Indian car manufacturer Mahindra & Mahindra underperformed the market, with its share price down around a third over the past year.
The four-star rated Schroder Responsible Value UK Equity fund also found itself in the worst performers as the UK market and value stocks remained firmly out of favour while the cloud of Brexit still loomed. A Conservative General Election victory has provided some clarity, which could help performance in the months ahead as sentiment towards domestically focused UK stocks starts to improve. The fund has returned 6.2% year to date.
Elsewhere, the three-star rated Axa WF Framlington Human Capital found itself in the weakest performers list despite posting a return of 13.57%. The fund aims to identify European companies with the best human capital practices including job stability and creation, training and development, performance management and reward systems. According to Morningstar data, the fund’s weakest stocks included Irish nutrition group Glanbia and French flooring company Tarkett – whose shares have tumbled 37.7% and 25% year to date.
