How have ethical funds performed?
While most fund sectors now contain a few ethical fund options, there are very few sectors which have enough funds, and with a long enough track record, to conduct an analysis which isn’t overly impacted by the performance of individual funds. Only three sectors have more than ten ethical funds with a five-year performance record, and the performance for ethical and non-ethical funds in these three sectors is presented below. The figures show on average, ethical funds have outperformed non-ethical funds in the Global and UK All Companies sectors, but have very slightly underperformed in North America.
The ethical tilt of these funds is just one stylistic bias at play in performance, however. For instance, the make-up of the UK market means ESG funds are likely to be skewed away from mega cap and cyclical names, because the top of the FTSE 100 leader board contains such a high weighting to oil and tobacco companies.
This is one reason why the performance differential between ethical and non-ethical funds is so marked in the UK, as in the last five years, mega cap stocks have fallen behind mid and small caps, and cyclical stocks have fallen behind growth stocks. First this was a result of Brexit, and then the pandemic. An underweight position in these underperforming areas of the market has therefore been a tailwind for ESG funds, though the wind direction could change if the market starts to reassess the prospects for more economically sensitive areas of the market, as it has done recently, most notably in the oil and gas sector.
In the US, by contrast, the biggest companies are the tech titans, which tend to score reasonably well on ESG measures. These have also driven the performance of the US market, and this likely goes some way to explain the very similar performance of ethical and non-ethical funds in this market, because the key performance drivers appear in both sets of funds.
| Five year total return % (annualised) | Ongoing Charges Figure | |||
| Sector average | Ethical | Non ethical | Ethical | Non ethical |
| Global | 13.8 | 12.6 | 0.89% | 0.90% |
| UK All Companies | 8.2 | 6.5 | 0.67% | 0.79% |
| North America | 15.7 | 15.8 | 0.79% | 0.81% |
Source: AJ Bell, Morningstar, total return to 26/09/2021, ethical funds are those which explicitly indicates any kind of sustainability, impact, or ESG strategy in their prospectus or offering documents.
