Morningstar Research Says Two Thirds Of Sustainable Funds Outperform

If you are investing online with the requirement that any funds you put your hard earned money into meet sustainability criteria, the good news is new research by funds data company Morningstar suggests there is no risk of having to compromise returns. The research indicates that the opposite is in fact the case and that Europe-domiciled that are marketed as sustainable are more likely to be ‘top performers’. That’s based on performance compared to the average performance in a fund’s particular category – for example large cap equities.

The Morningstar research found that two thirds of funds marketed as ESG outperformed their category average. 34% made it into the top 25% and 63% the top 50%. The research looked at fund returns over the year that ended June 30^th.

Hortense Bioy, Morningstar’s director of passive strategies and sustainability research for Europe puts the positive performance of ESG funds down to the fact that companies with an ESG focus “tend to be lower-volatility and higher-quality companies that hold up better during market downturns.”

Morningstar additionally commented:

“These numbers are consistent with evidence from academic research that suggests no systematic performance penalty associated with sustainable investing and possible avenues for outperformance based on reduced risk or added alpha.”

The fund data company did add the caveat that because the returns figures the research looked at were net of fees further research was required to determine how much of the positive performance of ESG funds could be attributed to lower fees.

Despite the sector’s strong performance, only 1.5% of total assets under management are still invested in ESG-marketed funds. However, the sector is growing quickly. Over 2018, a total of 305 ESG funds were launched across Europe. 2019 is set to surpass that total with 168 launched over the first half of the year. The trend of existing funds being remarketed as ESG-compliant is slowing. This year so far only around 10 funds have been renamed compared to over 40 during 2018.

The fund managers with the strongest presence in the ESG sector are mainly from northern Europe. Among the biggest ESG asset managers are Norway’s Storebrand, Handelsbanken and Swedbank from Sweden and NN Investment Partners of the Netherlands. Northern European asset managers have been more actively developing and promoting ESG funds for several years longer than those from many other parts of Europe, including the UK.