No performance loss seen in ESG funds

Superannuation fund members who opt for an environmental, social and governance fund experience no performance loss compared to a non-ESG approach, according to Rainmaker.

In its research, the firm identified 43 super funds that identified as ESG super funds and managed $1.8 trillion, up 13% since 2021.  

The organisation said the 10 biggest funds accounted for $1.2 trillion of the total $1.8 trillion and this concentration was “growing rapidly”. Seven of the 10 were not-for-profit funds and three were retail funds.

Rainmaker found the returns delivered by ESG super funds were as robust as those offered by regular super funds.

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Analysis of MySuper returns compared to the broad market found three and five year periods up to December 2021 showed “no discernible difference” between the median returns in the ESG sample compared to the broad market. Both delivered 10.6% over three years and 8.5% over five years per annum.

Comparison of Rainmaker’s Diversifed ESG indexes of rolling 12-month returns from 2015-2021 showed “no difference in investment outcomes” for ESG investment options. The ESG Diversified index delivered 8.6% compared to 8.8% by the broad market over five years per annum.

“It is unreasonable to argue that ESG super funds outperform simply because they follow ESG investment principles. But the key strategic point is there is no evidence that investors into ESG super funds suffer any performance penalty at all. Indeed there is evidence to the contrary, namely that ESG super funds are indeed highly likely to outperform.”

Source: Rainmaker 

There had also been a difference in the types of screening used by super funds for ESG purposes; the number using positive screens had increased dramatically from 52% to 80% while negative screens had increased from 87% to 95%.

The proportion which were using no screening at all had halved from 10% to 5%.

“Crucially, the way ESG funds have done this is by applying the PRI SDG framework, a practice now explicitly followed by half the ESG super funds in Rainmaker’s 2022 sample. It’s quite likely many other ESG super funds do so too but haven’t yet explicitly articulated this position.

“This principles-based SDG approach is highly practical because it enables super fund trustee boards to implement nuanced fiduciary-led and engagement-driven ESG investment decision making practices, rather than simplistically following tick-box divestment strategies.”