ESG vs non ESG portfolios

And the most performing is..? 

In recent years, the attention paid by investors, both retail and institutional, to ESG and socially responsible investments (SRI) has grown exponentially. But is it just a marketing “trend”? We dare say, quite the opposite. Results demonstrate that sustainable investments not only reduce risk, but also consistently return superior performances when compared to non-ESG portfolios.

Socially responsible funds in Europe reached around € 668 billion AUM at the end of 2019, confirming the growing interest by final investors in this type of product (+56% growth rate over the past year). Last year 360 new sustainable funds were launched, bringing the total number of SRI funds available on the European market to over 2,400 between active funds and ETFs.

An ever-increasing number of portfolio managers analyses ESG criteria with a risk management purpose. In fact, if it is true that socially responsible funds do not guarantee an economic return, researches have shown on the one hand that a company particularly attentive to ESG issues has a lower risk of incurring into frauds, scandals, sanctions and reputational damages. On the other hand, the exposure to macro-trends or sustainable investment themes, such as renewable energy, water reserves treatment, demography issues or Green Bonds, have generated higher returns in the medium to long term compared to non ESG-focused funds.

In this regard, empirical evidence shows that over the past two years, the main global ESG equity and bond indexes have overperformed the corresponding non-EGS indexes.

Equity ESG vs non-ESG indexes 

As an example, the MSCI World ESG Leaders index has outperformed the MSCI World by + 2.70% since the beginning of 2018, while the JP Morgan ESG EMBI Global Diversified index has beaten the equivalent non-ESG “brother” (+ 1.50% in the same period).

(Source: Bloomberg, end of January 2020 data)


Bond ESG vs non-ESG indexes

When comparing balanced funds results, sustainable funds are able to overperform their historical competitors within a peer group, and are also successful in limiting volatility and drawdowns in the market correction stages, thus providing a very attractive risk-reward profile for final investors. (Source: Bloomberg, end of January 2020 data)

Within ESG funds offer however, it is necessary be careful while selecting products and asset managers in order to identify authentically and intrinsically sustainable ones, from those that have adopted “window dressing” operations with the intention of including their products into ESG screening.

Balanced ESG vs non ESG portfolios

In this context, GreenEthica by FIA Asset Management has developed an internal ESG scoring system, which has allowed us to identify multiple “greenwashing” situations. Moreover, our internal Investment Committee team relies on the scoring system when defining the proprietary database (GreenEthica Data), which is composed by the best available sustainable strategies on the European market. The fund analysis is therefore extremely accurate as both qualitative and quantitative parameters are considered. Unlike asset managers exclusively relying on exclusion lists – and therefore external provided data – as their main reference within the ESG asset selection, our investments team operates an active analysis, supported by specific internal criteria of sustainability and ethics. This aspect, along with analysis of sustainability reports and the asset managers’ background entail a considerable added value in identifying committed sustainability portfolio managers and thus, actual ESG funds.

So, is ESG-focused portfolio management just a marketing “trend”? According to available data, it is quite the opposite. Major global ESG committed asset managers demonstrated to deliver higher performances to their clients. However, we are strongly convinced that the keystone must be found in the way sustainable portfolio management is carried out. This is the element that gives sparkle and added value to investors, in terms of risk reduction and consistent higher financial performances, and contributes to concretely achieving the UN Sustainable Development Goals (SDGs).

Gianluca D’Alessio

Portfolio Manager, GreenEthica by FIA Asset Management

Check out the entire article published on Agefi February edition 2020