Large-cap funds with higher ESG ratings have seen a worse overall performance in the past year compared to those with lesser credentials.
Research by Bowmore showed the higher a fund’s ESG rating, ranked based on Morningstar’s sustainability ratings, the worse its returns over the year to June 22.
The funds with a higher rating saw a loss of 13 per cent on average in the period, compared to those with lower ESG ratings which lost 4 per cent.
Jonathan Webster-Smith, chief investment officer at Bowmore Wealth Group, a financial planning and investment management firm, said the performance is largely down to the underperformance of certain sectors seen as more ESG-friendly.
Sectors such as commodities, oil and gas, mining and defence have seen bumper returns in recent months.
ESG funds performed poorly in comparison to non-ESG counterparts
Source: Bowmore Wealth Management
Oil and gas companies in particular have benefitted from the high prices driven by global shortages.
Defence firms have been boosted by the demands from the war in Ukraine, and commodities companies have seen high profits after Covid-related supply-chain issues pushed up prices.
Meanwhile, UK ESG funds are “typically overweight life insurance and consumer discretionary stocks”, Bowmore said, which have performed poorly recently.
Consumer-facing equities especially, such as supermarkets, have suffered from fears of a drop in consumer spending due to the cost of living crisis.
Webster-Smith said investors should be conscious that all assets go through periods of underperformance, especially those that benefited from years of excess liquidity and low interest rates.
“While it is tempting to question ESG funds due to their recent poor performance, investors need to be patient,” he said.
“Over longer time horizons, earnings matter and ESG funds should deliver better returns than funds which don’t consider ESG due to the growth opportunity.”
He added that the flows of money that has moved and we suspect will move over the next few years ESG funds should create a premium on ESG focused companies.
“The investment that we expect to see within clean energy is going to be significant, but any ESG focused businesses should also do better through stronger employee, customer and supplier relations.”
sally.hickey@ft.com
