Sustainable Fund Outperformance Questioned

A report from Barclays Capital entitled “ESG Funds: Looking beyond the label” considered the underlying assets in ESG and sustainable funds over the past 20 years.

Researchers from Barclays’ Quantitative Portfolio Strategy team found negligible difference between fund holdings in dedicated ESG funds and those of non-ESG U.S. equity funds.

The news comes as investment managers continue to witness substantial inflows into dedicated ESG and SRI funds. The CFA Institute also now requires all investment professionals to consider ESG factors as part of their investment analysis and decision making processes.

“Responsible investing has become a hot topic in financial markets in recent years with many investors racing to integrate ESG issues into their investment process,” Jeff Meli, head of research at Barclays, explains.

At the end of June, Morningstar released data showing that second quarter net flows into U.S. sustainable funds hit $10.4 billion.

The company noted that the total inflows witnessed for the whole of the first half of 2020 stood at $20.9 billion, not far off of the annual total for 2019 -- $21.4 billion.

Quarterly flows into U.S. sustainable sector funds have been growing substantially since the beginning of 2019, with the exception of Q3 2019 which was just shy of the previous three month period.

However, the Barclays QPS team found that, despite investor interest in ESG funds, there was little evidence to show that the underlying assets had higher ESG scores than those of non-ESG funds.

Barclays noted that there continues to be a lack of continuity in how asset managers use ESG terminology, which can lead to confusing labelling. One way to improve this could be through the introduction of dedicated benchmarks, the QPS research team suggests.

“There is little consensus on what defines an ESG fund, complicating both analysis and investment decisions,” Barclays analysts Carlo Rosa and Arik Ben Dor concluded in their research. “The issue is exacerbated by the diversity of ESG indicators and scores from various data providers.

“Using two decades of funds’ holding data, we find that ESG-labelled funds do not necessarily provide more ESG exposure than conventional ones. Both time series evidence and an event-study approach indicate that ESG funds have higher, but not significantly different, ESG scores than those of non-ESG funds.”