Responsible investment (RI) funds have struggled in the short term, but over five years have outperformed in two out of three indices, according to research by Square Mile’s 3D Investing.
In its twice-yearly Good Investment Review, the firm found funds sitting in the Responsible UK All Companies peer group returned 12.6%, performing two percentage points better than the IA UK All Companies sector over five years.
Over the shorter term, RI funds have performed worse than their traditional counterparts returning -15.5% versus -10.8% respectively year-to-date.
A similar picture was seen for the comparison between the IA Global Fund and the RI Global Fund benchmarks, with five-year performance at 48.4% for the former and 59.32% for the latter. While year-to-date figures showed the RI index at -10.2%, two percentage points worse than the traditional equivalent.
However, over five years the RI IA Sterling Corporate Bond peer group posted a loss of 3.1%, slightly underperforming the IA Sterling Corporate Bond counterpart by less than one percentage point.
Anna Mercer, head of 3D Research, said, “2022 has been a hard year in many ways. While the worst pandemic in living memory seems now finally to be receding, from the cost-of-living crisis to armed conflict to extreme weather events, there has been precious little positive news to lift spirits. This extends to financial markets, and while investors of all stripes have suffered, responsible investment funds have been particularly hard hit.
“It is at times like this that it is vital to block out short-term noise and keep an eye fixed on a more distant horizon. All investment strategies fall in and out of favour, but the very real problems faced by the planet and the people who live on it will not go away without positive action now. Responsible investment funds play an incredibly important role in supporting this positive action by investing in compelling businesses which can be part of the solution whilst delivering financial returns.”
Writing in the report, Aegon Asset Management investment specialist – equities, Ian Snedden, reiterated that investors need to look further ahead.
He said since late 2021, a strong inflationary environment has caused a rally in value stocks and sectors out of favour until recently, such as utilities, energy and consumer staples.
“None are typical hunting grounds for ESG investors though,” he said.
An inflationary environment is typically unfavourable for growth stocks and it has impacted the whole growth landscape including most RI funds which tend to have a growth rather than a value style, Snedden said.
“This trend has affected the whole growth investing landscape, ESG or otherwise, so it’s
important to avoid thinking this is solely an RI issue,” he commented.
Snedden highlighted some of the sustainability challenges which illustrate the need for a longer-term outlook such as the $4.2trn annual investment in the green energy transition required between 2026 and 2030.
