Trucost Blog / 07 Dec 2010

ESG funds outperform

An increasing number of investors are including environmental, social and governance (ESG) analysis as a measure of risk and opportunity in their investment decision making.

Investors have long accounted for risk in their investments.

An increasing number are now including environmental, social and governance (ESG) analysis as a measure of risk and opportunity in their investment decision making.

We recently launched a research piece in collaboration with RLP Capital that examined how ESG managed funds have performed financially when compared against the largest traditional funds in those asset categories.

The results of this study are striking, finding that funds that incorporate ESG analysis have outperformed traditional funds over one-and three-year periods. Seven of the eight responsible funds included in our research outperformed over both one and three-year periods and all eight responsible funds had significantly higher alpha, or risk-adjusted performance, over the three year period ending 30th June 2010.

At the same time, these ESG funds generally had smaller carbon footprints than traditional funds, indicating lower exposure to the risk of potential carbon costs.

The finding that funds which integrate ESG factors into their investment processes can reduce their environmental footprint, while achieving stronger financial returns is important on its own.

The better news is that by adding these ESG factors investors are positioned for the future.  As energy prices increase and corporate carbon emissions become an important source of financial risk and opportunity, ESG funds only stand to gain further.

I believe that this trend is likely only to grow for three reasons:

1) ESG issues continue to become more material.  This is going to increase with risk from regulation, reputation, and innovation/efficiency.

2) the quality of ESG research is improving significantly, as is the quantity and quality of disclosures being made by companies.

3) the sophistication of the ways this data is being used by investors is improving. When investment decisions are made using high quality ESG data as one of the balanced considerations, as this report shows, the result can be financial outperformance.

Download research Carbon footprints, performance and risk of US equity mutual funds

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Events Green Finance Summit – Phoenix – 3 – 4, 2020

The GreenFin Summit follows a successful launch event in 2019. That invitation-only event brought together 100 corporate sustainability leaders, major public-sector pension fund executives and leading financial institutions, with over a trillion dollars of combined assets under management. The discussion broached vital topics in ESG that will be expanded upon at the 2020 Summit. Richard Mattison...

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