A Singapore study found that the performance of US equity funds which focused on sustainable investing depended on how they integrated information about environmental, social and governance, with inconsistent approaches causing significant dispersion in returns.
The annualised investment return dispersion among the funds was as high as 6.5% over the past six years, according to the study published by Scientific Beta, a Singapore-based investment consulting firm.
If the industry exposure factor is removed, the return difference between the best and worst ESG funds was still a high 4.9%, the firm says in a report on February 22. It found that the dispersion was a more dramatic 22.5% in individual years if the industry exposure factor is taken out.
According to Felix Goltz, Scientific Beta’s research director, the overall dispersion was not driven by a common sustainability factor.
“Instead, fund returns largely depend on fund-specific choices of how to integrate ESG information,” he says in the report.
“Our evidence emphasises that inconsistencies in ESG approaches contribute to significant dispersion in the performance of ESG investment products. Investors need to be aware that fund selection risk is a material issue for sustainable investment strategies.”
Goltz warns investors not to rely heavily on historical figures or tracking errors to predict the future performance of ESG funds.
“This brings substantial fund selection risk to ESG investors,” he says.
