In the past, there used to be scepticism in the investment community whether adopting Environmental, Social and Governance (ESG) investing can mean sacrificing on financial returns. However, these apprehensions are no longer raised as funds investing in companies with strong ESG scores show high returns.
ESG funds are those that assess not just financial but also non-financial risks while evaluating a company. They assign ratings to the companies by calculating a score based on their activities across environmental, social and governance aspects. Environment criteria includes actions on reducing climate impact, the efficiency of resource usage, pollution generated, etc. Social factors include health and safety measures for employees and the manner of treatment of customers. Governance mainly includes anti-corruption measures, upholding shareholders’ rights and greater tax transparency. These funds can minimize intangible risks and create a portfolio with greater long-term sustainability. They have a better perspective on a company’s management quality, strategy and purpose. They also generate higher interest from potential investors as they can not only contribute positively towards the environment and human development but also generate handsome financial returns.
The companies with high ESG score incorporate sustainability as a core value and reduce the exposure to sudden shocks over the long term by taking into account not just how much money they are making but also how they are making that money. They are mindful of how their activities are impacting the environment, how their relationship with their employees and customers are, and whether they are ethically conducting the business. High focus on ESG protects the companies from regulations penalising/taxing businesses responsible for harming the environment. It also improves the efficiency of operations by making the firms more adaptable and innovating as they continuously seek to evolve their business model to enable greater operational sustainability. Finally, it creates a positive brand image in the minds of the consumers leading to higher customer retention.
In order to see how the ESG funds are performing vis-à-vis their benchmarks, Bloomberg publishes an annual ranking of largest ESG funds and their 1-year, 3-year and 5-year returns. The ranking comprises of US-based open-ended funds that mention either ESG or environmentally friendly or clean energy or climate change or socially responsible or Religiously responsible or Islamic in their investment strategies in the prospectus. Further, they should be existing for a minimum of five years and have at least $100mn assets under management (AUM) along with a minimum 80% allocation to equity. In their fourth annual rankings of 2019, Bloomberg surveyed 75 funds of which the top 10 are ranked in the following table.
ESG Funds with the Highest Score in 2019
| Rank | Name | Manager (s) | Portfolio Composition | AUM $m | Returns (%) | Bench- mark Index |
| 1 | Morgan Stanley Institutional Fund – Global Opportunity Portfolio (MGGPX) | Kristian Heugh | IT – 33.2% Consumer Discretionary – 27.6% Communication Services – 13.7% Industrials -8.9% Others – 16.6% | 3,846 | 1 yr: 35.03 3 yr: 23.66 5 yr: 17.60 | MSCI All Country World |
| 2 | Brown Advisory Sustainable Growth Fund (BIAWX) | Karina Funk and David Powell | IT – 36.7% Healthcare – 25.5% Consumer Discretionary – 14.8% Industrials – 8.7% Others – 14.3% | 2,086 | 1 yr: 34.88 3 yr: 21.66 5 yr: 16.49 | Russell 1000 Growth |
| 3 | Morgan Stanley Institutional Fund – International Opportunity Portfolio (MIOPX) | Kristian Heugh | Consumer Discretionary – 38.4% IT – 19.2% Communication Services – 9.2% Consumer Staples – 8.6% Industrials – 6.5% Others – 18.1% | 1,761 | 1 yr: 34.79 3 yr: 21.79 5 yr: 14.70 | MSCI All Country World Ex-U.S. |
| 4 | Calvert Equity Fund (CSIEX) | Joseph B. Hudepohl, Lance V. Garrison, Jeffrey A. Miller and Robert R. Walton Jr. | IT – 28.8% Healthcare –15.5% Consumer Discretionary – 11.6% Industrials – 10.3% Materials – 7.2% Communication Services – 6.5% Others – 20.1% | 3,766 | 1 yr: 36.50 3 yr: 21.70 5 yr: 13.85 | Russell 1000 Growth |
| 5 | Ave Maria Growth Fund (AVEGX) | Adam P. Gaglio and Chadd M. Garcia | IT – 25.1% Industrials – 21.5% Consumer Discretionary – 15.1% Financials – 11.4% Healthcare – 8.8% Others – 18.1% | 878 | 1 yr: 37.09 3 yr: 19.67 5 yr: 13.32 | S&P 500 |
| 6 | Putnam Sustainable Leaders Fund (PNOPX) | Katherine Collins and Stephanie Dobson | IT – 30.5% Healthcare – 14.7% Consumer Discretionary – 14.5% Financials – 8.4% Industrials – 7.6% Consumer Staples – 7.3% Others – 17% (As of 31st May 2020) | 4,941 | 1 yr: 35.84 3 yr: 20.20 5 yr: 13.24 | Russell 3000 Growth |
| 7 | Amana Growth Fund (AMAGX) | Nicholas Kaiser, Scott Klimo and Monem Salam | IT – 43.5% Healthcare – 18.1% Industrials – 12.8% Consumer Staples – 11.3% Others – 14.3% (As of 30th June 2020) | 2,269 | 1 yr: 33.07 3 yr: 20.68 5 yr: 13.50 | S&P 500 |
| 8 | Morgan Stanley Institutional Fund – International Advantage Portfolio (MFAPX) | Kristian Heugh | IT – 20.4% Consumer Discretionary – 19.9% Consumer Staples -16.6% Financials – 11.6% Industrials – 9.9% Others – 21.6% | 2,397 | 1 yr: 29.72 3 yr: 20.89 5 yr: 14.68 | MSCI All Country World Ex-U.S. |
| 9 | AllianzGI Focused Growth Fund (PGWAX) | Karen B. Hiatt and Raphael L. Edelman | IT – 40.3% Healthcare – 20.8% Consumer Discretionary – 14.1% Communication Services – 9.7% Industrials – 8.1% Others – 7% | 1,040 | 1 yr: 33.85 3 yr: 18.37 5 yr: 13.12 | Russell 1000 Growth |
Returns – As of 31st December 2019, Portfolio Composition-As of 31st March 2020, unless otherwise mentioned, AUM $m – As of 27th Jan 2020
According to Bloomberg’s survey, nine of the largest ESG mutual funds in the US outperformed the S&P 500 Index in 2019 – indicating a clear positive signal for the market towards the success of ESG investing. On the market performance of sustainably conscious companies, Karina Funk, manager of the Brown Advisory Fund, said that-
It turns out companies that generate strong business results by helping their customers with energy efficiency, solve some of our biggest sustainability challenges, and companies that are productivity leaders by reducing their resource consumption are performing well.
Karina Funk, Manager, Brown Advisory Fund. Originally quoted at Bloomberg.
Thus, ESG funds are not only contributing to society by encouraging sustainable practices but also ensuring better financial performance than the market. In a society that is becoming more conscious, globally, ESG investing is here to stay.
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I am interested to know how come is consumer discretionary part of all this story?
I just don't see the connection, since they do not invest in any green initiatives.