Trucost, the environmental research firm, and RLP Capital, a forward-thinking independent wealth management firm, collaborated to study the effects of ESG analysis in actively managed U.S. equity mutual funds. The study compared the carbon footprints, performance and risk characteristics of the eight largest traditional mutual funds (by asset size) with the eight largest responsible funds in several key asset categories.
Findings shows that seven of the eight responsible funds that incorporate environmental, social and governance (ESG) analysis outperformed over both one and three-year periods. All eight responsible funds had significantly higher alpha, or risk-adjusted performance, over the three year period ending 30th June 2010. The responsible funds also demonstrated smaller carbon footprints that the traditional funds, making them less exposed to the rising costs of greenhouse gas emissions under planned climate change policy measures. The U.S. Government has committed to reducing greenhouse gas (GHG) emissions by 17% compared to 2005 levels by 2020 under the United Nations Copenhagen Accord of December 2009.
While traditionally managed mutual funds use an investment approach that relies solely on traditional financial analysis, responsible investment managers incorporate both traditional financial analysis and ESG analysis to identify firms with solid financial prospects that also demonstrate positive track records with regard to the environment, social issues and corporate governance. RLP examined over 30 ESG criteria to determine what factors, if any, are incorporated into each mutual fund’s investment process.
James Salo, vice president of strategy and research at Trucost comments, “This groundbreaking study demonstrates that funds that integrate ESG factors into the investment process can reduce their environmental footprint, while achieving strong financial returns. As energy prices increase and corporate carbon emissions become an important source of financial risk and opportunity, ESG funds stand to gain further.”
Bud Sturmak, managing director of RLP adds “While responsible investing has long been a feel good story, 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.”
The research collaboration draws on RLP’s extensive mutual fund ESG research and Trucost’s expertise in the calculation of corporate environmental impacts. Trucost has been researching, standardising and validating corporate environmental impacts for over 10 years. The investment return and principal value of a mutual fund investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost.
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