In 2020, funds with exposure to less environmental, social, and governance risks outperformed their peers that did not account for ESG principles.
Jeffrey Ptak, head of global manager research for Morningstar, points out that funds courting less ESG risks beat their benchmark indices more often and with a greater average margin than funds courting more ESG risk in 2020.
“There’s a lot of debate about whether incorporating ESG helps or hurts returns,” Ptak said. “This study reveals some patterns that shed light on broader performance trends in 2020, trends that bear watching as more ESG funds launch in the future and other funds consider incorporating ESG into their investment process.”
Around 46% of funds rated “High” or exhibited low ESG risk generated higher returns compared to their benchmark while only 30% of funds rated “Low” or showed high ESG risk did the same. Furthermore, there was a better average payoff to investing in funds that courted less ESG risk, as these funds beat their benchmarks by a larger average margin than funds with lower ESG ratings.
The relationship was more pronounced among international stock funds, where strategies that courted low ESG risk beat their indices about twice as often. The relationship was weaker among U.S. stock funds.
Ptak cautions that "the relationship between ESG risk and fund success was weaker when it came to ‘intentional’ funds that explicitly aim to advance ESG goals than it was among funds not seeking to advance such goals." The success did not depend as much on the level of ESG risk when the fund was explicitly trying to minimize ESG risk.
“There seemed to be a stronger relationship between ESG risk and the average payoff of investing in non-intentional funds,” Ptak added. “There was a wider spread in the average excess returns of higher- and lower-ESG rated non-intentional funds than of intentional funds.”
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