OECD Report Questions ESG Returns

    Stockholm (NordSIP) – At the core of the rise in popularity of sustainable investments is the increasing weight of research evidence suggesting that this approach yields better returns for investors. Although doing good for its long-term sake is an admirable pursuit, investor participation necessarily requires a viable financial return to be attached to the integration of non-financial factors into investment decisions.

    However, a recent report published by the OECD titled “ESG Investing: Practices, Progress and Challenges”, found “little difference shown in the performance of high [ESG] scoring and low scoring funds, showing for both a wide range of performance.”

    The authors used a sample of funds from Morningstar and considered how the best 50 performing funds for the 1, 3, 5 and 10 years annualised returns. The authors then compare them to their sustainability ratings,  which are based on Sustainalytics ratings. According to the report, their analysis suggests “a negative correlation of sustainability and performances of around -0.5 for different time periods (1 and 5 years) and slightly more negative for the 10 years (-0.7)”.

    “The extent to which performance varies in both categories indicates that different factors, including specific investment strategies and how they are implemented, drive results of funds. There should not be generalisation based only on ESG scoring when looking at the financial returns of funds, suggesting the importance of financial education regarding retail funds.”

    An illustration of the importance of non-ESG factors highlighted in the report is the dominance of strategies focused on equity among the best performers. In contrast, the worst performers’ common strategies focused on fixed income, among the 5-Star funds.

    The report also found that the distribution of returns tends to range from -20% to +20%. However, the authors noted that “while the distribution of the funds looks similar, (…)  the low scoring funds (…) are much more likely to suffer from downside risk, with few funds performing well below -20%.”

    This analysis is part of a broader report about ESG, which also considers broader ESG concepts and assessments. The report highlights the wide variety of metrics, methodologies, and approaches that, “while valid, contribute to disparate outcomes”, according to the authors. “This lack of comparability of ESG metrics, ratings, and investing approaches makes it difficult for investors to draw the line between managing material ESG risks within their investment mandates, and pursuing ESG outcomes that might require a trade-off in financial performance.”

    Nevertheless, the report remains optimistic about the potential of ESG approach to “unlock a significant amount of information on the management and resilience of companies when pursuing long-term value creation”, while also potentially helping “investors better align their portfolios with environmental and social criteria that align with sustainable development”.

    Image @jopanuwatd via Twenty20

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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