Analysis published today in the latest issue of The Good Investment Review from Square Mile’s 3D Investing provides further evidence that investing for positive impact need not come at the expense of financial returns and frequently improves performance. Comparing like with like, 3D Investing analysed actively managed, non-thematic strategies within its universe of 348 funds across the IA UK All Companies, Global and Sterling Corporate Bond sectors.
The research compared Responsible Investment (RI) funds within each sector over discrete annual periods to highlight the consistency of performance as well as the cumulative five-year returns against the sector as a whole.
IA UK All Companies sector
Of the 13 funds with a five-year track record, over two thirds (69%) outperformed the sector average over the period, with the average RI fund posting a 58.7% return relative to a return of 44.2% for the IA UK All Companies sector as a whole. In addition, these funds have consistently beaten the sector average every year over the last five years, with the exception of 2016 and 2021 year to date, where the performance is level pegging.
IA Global sector
There was also significant outperformance among the global equity RI funds analysed relative to the sector average over the last five years, with the average RI fund returning 101.7% against 87.4% for the IA Global sector. Moreover, the average RI fund has outperformed the IA Global average in four out of the last five years with more thematically-driven funds yielding the best returns. The analysis suggests that there has been no trade-off between positive impact and financial returns. If anything, the reverse appears to be the case, with RI themed funds benefitting from long-term tailwinds and avoiding some of the environmental and social headwinds that have detracted from the performance of traditional funds.
IA Sterling Corporate Bond sector
The performance of RI Sterling Corporate Bond funds has been more mixed, due in part to the fact that the universe of investible securities is more limited for corporate bonds than for equities. However, over five years, the sector average for RI bond funds remains higher at 19.1% versus 18.1% for the overall sector, demonstrating that investors have not sacrificed performance by allocating to these strategies.
The 348 certified funds in 3D Investing’s universe adopt a range of approaches to RI. Each fund has undergone robust assessment based on the 3D Investing philosophy built around making a positive social and environmental impact in line with the United Nations Sustainable Development Goals (SDGs). The three underlying tenets of this philosophy are:
- ‘Do good’ by investing in solutions to global social and environmental challenges that make a significant positive contribution to the SDGs.
- ‘Avoid doing harm’ by not investing in companies that make a significant negative contribution to the SDGs.
- ‘Lead change’ through engagement with investee companies, co-operation with other investors and change activists, and through informing opinion.
These funds have total assets under management of £280 billion as at 31st August 2021, an increase of £59 billion since the last issue of the Good Investment Review, equating to 26.8% over six months. Over this period, 34 funds have been added to the 3D Investing universe.
Trends in new fund launches
Since April this year, the proliferation of RI funds has continued, notably among new multi-asset funds providing ranges of ‘all-in-one’ solutions managed to meet given risk profiles. These largely adopt a combination of ethical screening and an ESG tilt with a minority allocation to sustainable solutions.
Given the attention that climate issues have attracted in the lead up to COP26, it is unsurprising that a number of fund groups have launched new vehicles aimed at tackling climate change, including JP Morgan, GAM and Schroders. The third major trend to emerge over the past six months is a restructuring of funds in response to SFDR with existing strategies being adapted and ESG policies strengthened to qualify for article 8 or 9.
John Fleetwood, Square Mile’s Director of Responsible and Sustainable Investing, said, “Once again, analysis of the funds across three major sectors within the 3D Investing universe has shown that performance is not sacrificed by investing responsibly: in fact, the reverse is true. And as the number of RI strategies continues to grow, investors have a much broader range of options offering exposure to wider range of sustainable solutions available to them.
“However, alongside this growing popularity of RI have arisen concerns of greenwashing; that funds are merely adopting a green veneer to attract investors who wish to make a positive change with their money. This underlines the importance of the vigorous assessment that 3D Investing carries out to ensure that Responsible funds deliver on their promise through the lens of our philosophy of ‘doing good; avoiding doing harm; leading change’.”
