Are ESG hedge funds a good bet? According to the ESG Fund Index the answer is yes.
The market for environmentally and socially responsible investing has multiplied over the past years as investors and companies have recognized the importance of corporate social responsibility.
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Demand for Environmental, social and governance (ESG) has bloomed as a result and corporations have been making a conscious effort to reform to meet investors’ requirements. For example, during the first quarter of 2017 total green bond issuance stood at $21.8 billion, up nearly 42% year-on-year. For 2017 as a whole credit rating agency, Moody’s estimates companies will issue $120 billion in green bonds, eclipsing the record of $93.4 billion issued last year. Green bonds are linked in some way to climate change solutions and fund projects that have positive environmental or climate benefits.
According to research from financial research firm Eurekahedge, ESG investors are well rewarded for their efforts to encourage companies to be better corporate citizens.
ESG Fund Index: Outperforming
Eurekahedge tracks the performance of 33 fund managers that incorporate an ESG framework in their investment process via the Eurekahedge ESG Fund Index. Year-to-date (end of July) this index is up 8.36% according to the financial research firm’s latest monthly report, that’s according to a return for the average global hedge fund of 4.34%.
Over the long-term, the performance of funds that incorporate and ESG framework is even more impressive. Post the financial crisis (December 2008) the ESG Fund Index has returned 9.41% per annum, while equity funds ex ESG framework trail by almost 60 basis points annualized (as shown below, if returns are taken from 2007, ESG lags non-ESG peers).
It seems these socially responsible funds are achieving outperformance with lower than average risk. “Sharpe ratios (risk-adjusted returns) for the Eurekahedge ESG Fund Index compliant funds have exceeded the underlying market benchmark as depicted by the MSCI ACWI ESG Leaders Index over all periods depicted,” Eurekahedge’s report on the topic notes. “To put this in perspective, with considerably lower annualized standard deviation of returns for ESG compliant funds, their Sharpe ratio over a five year annualized period comes in at 1.25 versus 0.81 for the MSCI ESG Leaders Index.”
However, before you go out and start shopping for ESG investments, Eurekahedge’s analysts note that when sorting Eurekahedge ESG Funds Index on their strategy into two main buckets: long only vehicles and hedge fund strategies, it becomes clear that those funds following a long only strategy (with an emerging markets tilt) have accounted for the majority of returns. Almost 42% of the constituents of the ESG index employee long only mandates while the percentage dropped to under 15% for the Eurekahedge Equity ex ESG Fund Index.