ESG mutual funds outperform traditional rivals, study claims
By Barry B. Burr | December 13, 2010
Funds incorporating environmental, social and governance analysis in their investment decision making outperformed traditional funds over one- and three-year periods, according to a study by Trucost PLC, London, and RLP Capital Inc., New York.
The study, released Nov. 30, compared the carbon footprints, performance and risk characteristics of the eight largest traditional mutual funds with the eight largest ESG funds by asset size in several key categories — large-cap blend, large-cap growth and midcap blend — for the periods ended June 30.
Findings show that seven of the eight funds that use ESG analysis outperformed the eight traditional funds over both time periods, according to the study, “Carbon Footprints, Performance and Risk of U.S. Equity Mutual Funds.”
All eight ESG funds had higher alpha, or risk-adjusted performance, over the three years.
Among the four traditional and ESG funds in the large-cap blend category, for example, traditional funds had an annualized total return of 12.95% and -9.66% for one and three years, respectively, while the ESG funds returned 16.89% and -6.88% for the same periods. A peer group of mutual funds in similar ESG strategies returned 13.17% and -10.01% in the respective periods.
The ESG funds “also demonstrated smaller carbon footprints than the traditional funds,” potentially making them “less exposed to the rising costs of emitting greenhouse gas emissions under planned climate change policy measures,” the study said.
Unlike traditionally managed equity mutual funds that rely only on traditional financial analysis, ESG equity funds “incorporate both traditional financial and ESG analysis to identify companies with solid financial prospects that also demonstrate positive track records with regard to the environment, social issues and corporate governance,” the study said.
The “study demonstrates that funds that integrate ESG factors into the investment process can reduce their environmental footprint, while achieving strong financial returns, James Salo, Trucost vice president of strategy and research, said in a statement about the study. “As energy prices increase and corporate carbon emissions become an important source of financial risk and opportunity, ESG funds stand to gain further.”
RLP Capital examined more than 30 ESG criteria in developing a proprietary rating system based on the degree to which each mutual fund incorporates ESG criteria. Six of the responsible funds received a 4 rating, the highest on the scale, while two responsible funds received a 3 rating. The eight traditional funds were rated zero, the lowest on the scale.
The 12-page study includes details of the performance of the individual funds in the study.
The traditional funds studied were American Funds' Fundamental Investors, Growth Fund of America and Investment Company of America funds; Davis New York Venture Fund; Fidelity's Contrafund, Leveraged Company Stock and Low-Priced Stock funds; and Vanguard 500 Index Fund.
The ESG funds were Ariel Fund and Ariel Appreciation Fund; Calvert Social Investment Equity; Domini Social Equity; Neuberger Berman Socially Responsive; Parnassus Fund and Parnassus Equity Income Fund; and TIAA-CREF Social Choice Equity Fund.
Trucost is an environmental research firm; RLP Capital provides asset management and consulting services.