Study Warns Against ESG Funds’ Negative Impact

    NordSIP (Stockholm) – The rapid growth in passive ESG funds is an exciting development for investors, a question mark continues to float over the issue of performance. In a recent white paper, Impact Cubed, an analytic and investment solutions provider for sustainable portfolios, asks at the net impact of passive ESG funds and their performance vis-à-vis tracking error.

    The analysis is based on the Impact Cubed Portfolio Impact Footprint model. The methodology uses 14 impact metrics to quantify the positive and negative impacts of the overall portfolio. This approach produces a net-impact measure as well as a ratio of the net impact to the overall tracking error, which shows the trade-off between the impact of the sustainable portfolio and deviation from its benchmark.

    Impact Cubed applied its impact measurement model to 13 popular passive ESG funds: iShares ESG Enhanced, Invesco ESG Screened, L&G ESG Global Markets, ISS ESG Prime, Lyxor ESG Trend Leaders, XTrackers World ETF, Invesco ESG Multi-Factor ETF, iShares World SRI, MS DM Sustainability 200, La Francaise Zero Carbon, MS DM Sustainability Leaders and MSCI Select ex Fossil Fuel.

    The report reaches two main conclusions. First, it argues that passive ESG fund performance can be “patchy”. Indeed, the study found at least three funds had a net negative overall impact, suggesting sustainable investors would have been better off not investing in those funds. According to report, this is because “there are big differences in impact among passive ESG funds. Indexes can be optimised for different ESG themes and, understandably, not every ESG fund does well on every factor.” Secondly, investors can find a passive ESG fund with positive impact and lower tracking error.  Indeed, although the report notes that “the potential for impact goes up with tracking error”, it also notes that this is not always the case. Moreover, even among the funds with a net positive impact, ESG performance varied four-fold between the ‘best’ and the ‘worst’.

    “As ESG investing becomes more mainstream, passive ESG fund managers who want to secure a proper perch in the pecking order for capital allocation will need to be more transparent about the impact provided by their approach,” Larry Abele, CIO of Impact Cubed and report co-author, advises.

    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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