Study Suggests ESG Mutual Funds Outperform

(December 1, 2010) — A study released Tuesday by Trucost and RLP Capital suggests that mutual funds incorporating environmental, social and governance analysis in their investment process outperformed traditional funds over one- and three-year periods.

The study highlights a trend among firms moving from an exclusionary approach to socially responsible investing toward an embrace of ESG — analyzing several factors to pinpoint companies with a competitive advantage. “What you’re seeing is that as data becomes increasingly sophisticated, ESG has become more mainstream in the last several years,” Trucost’s Dr. James Salo told aiCIO. “They’re now simply enhancing their financial analysis with another overlay.”

The research — which compared the carbon footprints, performance, and risk characteristics of the eight largest traditional mutual funds and eight largest ESG funds — demonstrates that responsible investing can provide investors with better risk adjusted performance. “The alpha performance rank data for the responsible funds in this study are hard to ignore,” said Bud Sturmak, managing director of RLP, in a statement.

“With corporate responsibility issues becoming mainstream in the last several years, measuring a company’s performance in areas outside of traditional financial performance is becoming increasingly relevant,” RLP Managing Director Bud Sturmak told aiCIO. According to Sturmak, ESG analysis can help investment managers more fully understand how companies are managed and get better sense of risks and opportunities. “I believe this study shows that ESG factors matter, and positive ESG factors can drive competitive advantage and deliver superior performance,” he said.

The study, titled “Carbon Footprints, Performance and Risk of US Equity Mutual Funds,” found that all eight ESG funds surveyed had higher alpha, or risk-adjusted performance, over the three years. While traditional funds had an annualized total return of 12.95% and -9.66% for one and three years, respectively, ESG funds returned 16.89% and -6.88%.

“This groundbreaking study demonstrates that funds that integrate ESG factors into the investment process can reduce their environmental footprint, while achieving strong financial returns,” commented James Salo, vice president of strategy and research at Trucost. “As energy prices increase and corporate carbon emissions become an important source of financial risk and opportunity, ESG funds stand to gain further.”

The ESG funds included in the research were the Ariel Fund and Ariel Appreciation Fund; Calvert Social Investment Equity; Domini Social Equity; Neuberger Berman Socially Responsive; Parnassus Fund and Parnassus Equity Income Fund; and TIAA-CREF Social Choice Equity Fund.