ESG investing provides strong returns

This article is part of
Guide to ethical investing

ESG investing provides strong returns

A previous criticism of ESG was that, in order to invest with the view of making a positive impact, growth or income would need to be sacrificed to some degree.

But recent performance data from Morningstar pours cold water on such claims.

The data – as at July 26 2019 – showed that the top three performing ESG funds all gained north of 16 per cent over a 12-month period. In addition, all of those occupying the top ten places recorded double-digit growth.

Top10 ESG performers over one year as at July 26 2019

 Fund name12 month return (%)
1Axa Global Factors Sustainable Equity16.96
2Liontrust Sustainable Future Global Growth16.8
3Hermes Impact Opportunities Equity16.07
4Liontrust Sustainable Future Absolute Growth15.34
5RobecoSAM Sustainable Water14.09
6Triodos Global Equities Impact Fund13.89
7Royal London Sustainable World13.88
8BMO Responsible Global Equity13.78
9Liontrust Sustainable Future Managed13.2
10CCLA COIF Charities Ethical Investment11.89

Source: Morningstar

However, not all funds fared quite so well, as the bottom four performers all fell in value over the past year, but the same could be said for any sector.

Investment strategies

In terms of the types of strategies managers can use to ensure the ethical mandate is being met, there are three main definitions: environmental, social and government; socially responsible investing; and impact investing.

However, despite often used interchangeably, there are some key differences.

Peter Michaelis, head of the Liontrust Sustainable Investment team, adds some further clarification about the sustainable methods fund managers use.

The first is negative screening, which, as it suggests, avoids certain industries because of the negative or damaging effects of their products. Examples include weapons and tobacco.

Mr Michaelis explains: “Another approach is to invest in sustainable themes. This is known as positive screening, as it sees funds focusing on what they want to invest in, rather than what they want to cut out.

“Such funds may concentrate on a single theme such as renewable energy while others have multiple sustainability themes that can include healthcare, resource efficiency, and education.

“Many cling to the perception that ethical investment is about what you can’t do, whereas we think it’s about what you can do.”

The third method involves engaging with the companies that managers invest in. This is called ‘impact-investing’ and is about influencing the management of firms into making positive changes to their strategy or operational management.

Which strategy is most appropriate will very much boil down to where an individual investor's values lie.

Kate Elliot, senior ethical researcher, Rathbone Greenbank Investments, says the starting point for any discussion around ESG always comes back to terminology.

“How inclusive is the use of the term ESG in this instance?

“Does it include funds with a sustainability, thematic or impact bias, or just those integrating ESG analysis into the broader investment process?” she says.

Despite these further nuances, Ms Elliot adds that, generally, the aim for most ethical investors is the desire to avoid harm and promote positive change.

“Alongside the selection of ethical and sustainable investments in the first place, an active approach to the ongoing management of investments promotes positive change through more robust voting and engagement.