Adding in environmental, social and governance criteria to an investment portfolio does not impact return, research has shown.
Of six ETFs tracked by Research Affiliates over four years, the one with no ESG overlay saw a similar performance to the other five.
Ari Polychronopoulos, head of product management and ESG at Research Affiliates, said: “If you cap-weight your ESG strategy, you should expect a market-equivalent return.
“The impact of ESG overlays on performance is virtually non-existent and merely reflects investor preferences in an existing strategy.”
Source: Research Affiliates
Five of the ETFs in the chart represent the five largest US ESG ETFs by assets under management. ETF 3 is the only non-ESG ETF, and reflects the performance of the SPDR S&P 500 ETF.
UK investors have flocked to responsible investment strategies in recent years, making up £94bn out of a total £1.4tn in funds under management, according to the Investment Association.
However, there is still uncertainty over whether aligning investment choices with ESG or responsible ideals impacts performance, or whether it is a ‘feel-good’ strategy.
Four in 10 advisers surveyed by the Association of Investment Companies in November 2021 said they think ESG investing is likely to lead to a better investment performance.
According to the research, 33 per cent of advisers and 31 per cent of DFMs said they are worried ESG investing will mean a higher level of risk.
The AIC said some advisers expected higher volatility with ESG funds due to their “narrowed universe”. Other concerns include that ESG investing does not always fit well with the risk-managed approach to building portfolios that advice firms adopt.
However, two months before that data was gathered, a group of academic researchers criticised the asset management industry for “sloppy thinking”, and said returns from ESG and responsible funds had been buoyed by money flooding into the space.
That will not be enough to sustain future expected returns, they said.
The Financial Conduct Authority has recently warned it may take action against ESG benchmark administrators, after a preliminary review of the overall quality of ESG-related disclosures showed a number of problems.
These included administrators not fully implementing ESG disclosure requirements and not implementing their ESG methodologies correctly (for instance using outdated data and ratings, or failing to apply ESG exclusion criteria).
Other issues include not ensuring underlying methodologies are accessible, clearly presented and explained to users and not including enough detail on the ESG factors included in these methodologies.
The FCA said it will be doing more work in this area, given the importance of ESG benchmarks.
Ultimately, end investors do not seem concerned about the sustainability of their investments, as two third of 1,000 UK investors surveyed by Charles Schwab said they are purely focused on maximizing returns.
Just under half (44 per cent) of respondents said they regularly consider environmental, social and governance factors when making a new investment.
sally.hickey@ft.com
