ESG Fund Performance, Trends and Pending Regulation
Part Two of our series on ESG Investing.
We defined ESG investing in our last blog and will now discuss performance, trends and pending regulation.
Performance & Trends
What might surprise many is that funds with an ESG focus have outperformed their peers to date, their strong performance has underpinned the increased appetite for ESG focused investing. Sustainability has proven to be a better indicator of long term performance in both equities and bond markets.
If one can receive a strong return while investing responsibly, why not? A PWC study indicated that 77% of European institutional investors plan to stop purchasing non-ESG European financial products in the next 24 months. PWC study here.
With increased demand and pending sustability regulation imposed accross all funds, soon we won’t be discussing ESG funds versus their peers, we’ll simply be discussing whether a fund has a strong or weak ESG rating.
Performance vs Rating
Fidelity analysed 2,660 firms and tracked performance by ESG rating, study here.
“Overall, we’re pleased to observe the relationship between high ESG ratings and returns over the course of a market collapse and recovery, supporting the view that a company’s focus on sustainability is fundamentally indicative of its board and management quality.”
Pending Regulation
With increased demand for ESG focused funds, regulatory bodies have been working to provide uniformed measurement & tracking of a company’s ESG strategy. Sustainability is a ‘hot topic’ and while some may mean well, not all companies are measuring ESG factors alike, often ‘greenwashing’ - the idea that a company is doing the bare minimum to appear to be making a difference and slapping a ‘green’ label on it.
To combat greenwashing, the EU has implemented the intial phases of their Sustainable Finance Disclosure Regulation, (SFDR) as of March 2021. The first phase simply asks asset managers and financial advisors to include their sustainability approach on their website/prospectus/periodic reports, even if the answer is simply ‘we do not consider sustainability factors’. Full directive found here (not light reading!)
The directive will address all funds and (not just funds that identify as ESG focused) to provide consumers with a fair assesment of the sustainability of any fund in the market. As the latter phases of the directive unfold, I imagine there will be a marked increased in funds with a higher sustainability rating as consumers will be immediately able to identify the least sustainable funds without having to research every company held within a fund (a hard task for anyone). As this is an EU directive it will apply to Irish funds available to your pension, savings & investments.
Questions, interest or feedback? Contact me anytime.
Rachel O’ Shea, Senior Consultant & Protection Manager
PH: 0214521328