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ESG vs non ESG portfolios: SFDR unveiled real sustainable funds and greenwashing attempts

An ever-increasing number of portfolio managers discloses to include ESG criteria in their investment process. SFDR regulation entered in force in March 2021, supporting fund selectors with a precise classification of ESG strategies, in order to identify the purely sustainable investments and to avoid greenwashing.

2020 has proved to be a year of great volatility on markets, and 2021 started with inflation rise fears which caused an yield increase and led to a sector rotation into equity strategies. Although socially responsible funds do not guarantee a positive financial performance, also in the current market environment comparative returns analysis has shown that a company particularly attentive to ESG criteria has a lower risk of incurring into frauds, scandals, sanctions and reputational damages. At the same time, the exposure to sustainable investment themes (e.g. renewable energy, circular economy, healthcare and well-being thematics, demography issues, social and Green Bonds), have been able to generate higher returns compared to non ESG-focused funds, both in the long term and during periods of high volatility.

In this context, empirical evidence demonstrates that over the last three years, the main ESG global equities and bonds indexes have outperformed the corresponding non-EGS benchmarks. As an example, the MSCI World ESG Leaders index has outperformed the traditional MSCI World by +1,84%, while the JP Morgan ESG EMBI Global Diversified index has beaten the equivalent non-ESG index by +1.94% in the same period (source: Bloomberg, end of March 2021 data).

The result of this over-performance is even more evident when comparing active funds’ results, and especially in the last two years. Focusing on balanced-flexible funds, sustainable vehicles were able to outperform their historical non-sustainable competitors, while successfully limiting volatility and drawdowns during market corrections. Furthermore, their bull capture ratio is aligned to that of non-ESG funds, thus providing a very attractive risk-reward profile for investors.

We should point out the necessity for investors to avoid selecting, within the huge ESG funds offer available, those asset managers which are just applying the so-called “greenwashing”. In this context, SFDR (“Sustainable Finance Disclosure Regulation”) entered in force in March 2021, supporting fund selectors with a precise classification of ESG strategies. Several funds that previously claimed to follow ESG criteria are actually classifying themselves as “Art. 6” (i.e. mainstream funds with no explicit sustainability scope), and others have been required to change the fund name itself to remove all references to "sustainability" from the fund's name. On the other hand, the number of funds that declare themselves as “Art. 9” (i.e fund with an explicit sustainable investment objective) is still relatively limited. Nevertheless, “Art. 9” funds proved not only to deliver an extra-financial results, but resulted in outperforming significantly their relative not-sustainable competitors.

Figure 1: Art. 9 funds vs non-ESG Portfolios

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In this context, GreenEthica by FIA Asset Management has developed an internal proprietary ESG scoring system applied to fund managers. It is based on the ESG analysis adopted within their investment processes, as well as its “weight” for the final decision on investments, with a specific screening on investments which are aligned to the 17 SDGs (UN Sustainable Development Goals). The fund analysis is extremely accurate, since both qualitative and quantitative parameters are considered. Besides, it provides the investor also the measurable figures on how much its investment is contributing to the sustainable transition and to the achievement of the 2030 Agenda for Sustainable Investments of the United Nations.

The current market environment and COVID-19 crisis proved to be a successful test for the ESG investment approach. During the whole 2020 and also in the first quarter 2021, the returns of sustainable funds ranked in their category's best quartile. The main reason is attributable to the fact that these funds have benefitted from their ESG screenings and analysis. Eventually, these funds proved to be more resilient during market corrections, with limited maximum drawdowns, while taking advantage of the market uptrend.

 

Gianluca D’Alessio

Senior Portfolio Manager

FIA Asset Management