Responsible investing reaps better returns

This article is part of
Sustainable Investment - October 2015

As a result of environmental and social governance forming investment choice, many think performance will suffer.

This is not necessarily true.

Antti Savilaakso, head of ESG research for EMEA at MSCI, says: “ESG performance has been slightly better depending on your measure [of time].

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“There are many different ways of how people do ESG and various different ways of categorising products and services, but it is pretty safe to say that most of the ESG products that are available have been outperforming their peers.”

When it comes to performance for the 12 months to 15 October 2015 the MSCI ACWI ESG index gained 6.1 per cent ahead of the broader MSCI AC World index rise of 5.9 per cent, according to data from FE Analytics.

In addition the MSCI ACWI SRI index is only just behind the wider index with a gain of 5.8 per cent.

On an individual fund level performance has been even stronger, with the Kames Ethical Equity fund outperforming both the Investment Association UK All Companies sector average and FTSE All Share index across one, three, five and 10-year time periods.

Audrey Ryan, manager of the Kames Ethical Equity fund, notes even with a dark green negative screening process performance has still been very strong.

Ms Ryan says: “It doesn’t mean we outperform every year, some backgrounds are more challenging particularly because of ethical criteria.”

In the UK All Companies sector there are five ethical, responsibly or sustainably managed funds appearing in the top quartile for the 10 years to 14 October 2015 led by the EdenTree UK Equity Growth fund with a return of 152.2 per cent compared with the sector average return of just 89.7 per cent.

In addition eight of the 14 ethical, responsible or sustainable funds in the sector with a 10-year record outperformed the sector average.

Adrian Lowcock, head of investing at Axa Wealth, points out ethical benchmarks have consistently beaten their non-ethical peers over a five-year period, as the FTSE4Good UK benchmark gained 48 per cent for the five years to 8 October compared with a 43 per cent gain in the FTSE All Share index.

Meanwhile the FTSE4Good Global index gained 62 per cent in the same periods against the 60 per cent rise in the MSCI World index.

He explains: “Much of this [outperformance] has been driven by the performance of oil and mining sectors which have suffered over the last few years. Many ethical funds have no exposure to these areas and therefore have protected investors from the falls.

“In addition ethical funds will have benefited from the outperformance of smaller and mid-sized companies. As a result of the filters ethical funds use there is a bias away from large companies, which has also helped performance.”

But while avoiding energy stocks during the oil price dip may have helped recently, investors in this area point out they still managed to deliver performance when these sectors are in favour - they just have to search for alternatives.