Equity mutual funds that incorporate environmental, social and governance (ESG) analysis are outperforming their more traditional peers, according to analysis by Trucost and RLP Capital.
Seven out of eight responsibly-managed mutual funds have “significantly higher alpha” over three years, according to the analysis, meaning risk-adjusted performance is better than the traditionally managed funds.
London-based environmental research firm Trucost and independent wealth management firm RLP compared the eight largest US traditional mutual funds, by asset size, with the eight largest US responsible funds.
“This study demonstrates that ESG analysis can provide investors with better risk-adjusted performance. The alpha performance rank data for the responsible funds in this study are hard to ignore,” said Bud Sturmack, managing director of independent wealth management firm RLP.
The report does not put a dollar value on the outperformance between the two groups, instead breaking this down by the asset class in which the funds invest.
Comparing the four traditional and four responsible funds that invest in a blend of large capitalisation companies, the responsible group were down on average 6.88% over three years, compared to a 9.66% drop in the traditional group. Over a five-year period, total returns were up 1.24%, while the traditional funds were up 0.10%.
The two large-cap growth funds that are responsibly managed outperformed over three years, losing 4.95% while the traditional funds fell 6.91%. But over five years, the traditional funds slightly outperformed, gaining 1.94% on average, while the responsible funds gained 1.51%.
As well as financially outperforming, the responsible funds also had a lower carbon footprint – with their constituents emitting on average 199 tonnes of carbon dioxide equivalent for every $1 million of revenue, compared to the traditional funds’ average of 332 tonnes.
“As energy prices increase and corporate carbon emissions become an important source of financial risk and opportunity, ESG funds stand to gain further,” added James Salo, vice-president of strategy and research at Trucost.
RLP has developed an ESG rating system for mutual funds, running from ESG-4 for funds that incorporate a high level of ESG analysis, to ESG-0, for funds that do not use any ESG analysis. All eight of the traditional funds scored ESG-0.
The Parnassus Equity Income Fund, which has $2.8 billion in assets under management and rated ESG-4, showed the highest alpha performance of any of the funds, performing in the first percentile according to Morningstar.
By contrast, the best-performing traditional fund, Fidelity Leveraged Company Stock, came in at the 22nd percentile.
By. Jess McCabe