ESG fund returns show high dispersion

A new study from Scientific Beta shows large performance disparities across ESG funds invested in US stocks.

The study entitled, “From ESG Confusion to Return Dispersion: Fund Selection Risk is a Material Issue for ESG Investors,” has the following findings:

Over a six-year period, the difference in annualised returns between the best and worst ESG funds is 6.5% when adjusting for differences in market exposure.

When removing effects due to differences in industry exposure, the difference remains high at 4.9%.

Over single years the dispersion can reach a maximum of 22.5% in terms of returns adjusted for market exposures, and 25.3% in terms of industry-adjusted returns.

Felix Goltz, co-author, and Research Director at Scientific Beta, said, “The large dispersion in returns shows that fund returns are not principally driven by a common sustainability factor. Instead, fund returns largely depend on fund-specific choices of how to integrate ESG information. This suggests that ESG investors face substantial fund selection risk. Importantly, traditional fund selection strategies like relying on past performance or tracking error are inadequate for predicting future ESG fund performance. Our evidence emphasises that inconsistencies in ESG approaches contribute to significant dispersion in the performance of ESG investment products. Investors need to be aware that fund selection risk is a material issue for sustainable investment strategies.”