'A majority of sustainable funds outperformed': Study confirms strong returns from ESG investment

The fast-expanding library of reports demonstrating the attractive returns on offer from green investments grew further today, as leading analyst firm Morningstar published an overview of nearly 5,000 European funds which confirmed there is no financial trade-off from supporting funds with strong environmental, social, and governance (ESG) credentials.

The report, entitled How Does European Sustainable Funds' Performance Measure Up?, examined the performance of sustainable open-end and exchange-traded funds versus traditional peers in seven popular categories.

Overall, the report spans nearly 4,900 funds domiciled in Europe, including 745 sustainable open-end and exchange-traded funds.

The analysis covered one, three, five, and 10 year timespans through to December 2019, as well as more recent experiences during the COVID-19 crisis in the first quarter of 2020.

"Average returns and success rates for sustainable funds across seven Morningstar Categories suggest that there is no performance trade-off associated with sustainable funds," the report concluded. "In fact, a majority of sustainable funds outperformed their traditional peers over multiple time horizons."

Over the 10 years through to 2019, nearly 59 per cent of surviving sustainable funds across the categories considered beat their average surviving traditional counterpart.

US large cap equity funds performed particularly well, with more than seven out of 10 live funds delivering higher returns than their average surviving conventional counterpart.

Moreover, the report found more sustainable funds have survived in the past 10 years, in relative terms - 72 per cent of sustainable funds available to investors 10 years ago have survived, compared with 45.9 per cent of traditional funds.

Finally, the report echoes recent findings from HSBC and others that suggest sustainable stocks have fared better through the economic crash triggered by the coronavirus crisis.

"Sustainable funds held up better than their traditional counterparts during the COVID-19 sell-off, delivering superior returns in all but one category," Morningstar said.

"The main takeaway of this study is that investing in sustainable funds doesn't require taking a performance trade-off," explained Hortense Bioy, director of sustainability research for EMEA and APAC at Morningstar.

However, she also counselled that strong overall performance "doesn't mean that all ESG funds have equal odds of success nor that past outperformance will persist. Many factors come into play".

She highlighted how fees from fund managers could have an impact on returns, citing the report's conclusion that lower-cost options tend to have greater odds of success.

The report comes on the same day as oil giant BP announced a $17.5bn write down, after it predicted the coronavirus crisis will accelerate the transition to a low carbon economy, leading to lower future demand and prices for oil.

"In February we set out to become a net zero company by 2050 or sooner," said BP chief executive, Bernard Looney, in a statement. "Since then we have been in action, developing our strategy to become a more diversified, resilient and lower-carbon company. As part of that process, we have been reviewing our price assumptions over a longer horizon. That work has been informed by the Covid-19 pandemic, which increasingly looks as if it will have an enduring economic impact."

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