Retail ESG mutual funds have better financial performances, but monitoring supply is needed

ESG investments are growing fast, supported by regulatory initiatives and increasing interest in sustainability issues. The pandemic-induced crisis has further highlighted the importance of business models with solid ESG factors to address the changes taking place.

Our sample (based on Assogestioni, Morningstar, Refinitiv and mutual funds information documents) covers retail mutual funds in which we identify as ESG those that are labelled this way or that declare to have investment policies based on such criteria. According to Prometeia’s estimates the assets invested in ESG retail mutual funds reached €27bn in June 2020, equal to five percent of mutual funds in the portfolios of Italian households.

In 2020, net inflows were positive for €4.5bn, unlike those of other mutual funds. According to the analysis on Prometeia and Ipsos survey data, it also emerges that current and potential retail investor base for ESG products in Italy is composed by younger, more digitalised, more optimistic and more financially educated individuals, compared to other investors.

Fig. 1   Risk-Adjusted Performance scorecard: ESG vs non-ESG mutual funds

Source: Prometeia estimates based on Assogestioni, Morningstar, Refinitiv data and mutual funds information documents.

But what does it mean for a ‘small investor’ to opt for a responsible investment in terms of financial performance? The crisis provided a unique opportunity to test the resilience of these products and their ability to stabilise the portfolio.

To compare the contribution of ESG and non-ESG mutual funds to the efficiency of the portfolio, we created a score that summarises several risk-adjusted performance measures and thus provides a comprehensive measure of the ‘quality’ of the products. The green areas in the scorecard in Fig. 1 identify in which years the score is higher for ESG mutual funds in a specific asset class. The time horizon chosen for the analysis is three years. Thus, we focus on products that have been only recently launched but, at the same time, we consider a sufficiently large time span characterised by different market trends. In particular, the sample includes all funds available on the market at the end of 2017 excluding oldest products, already on the market before 2015. Our results suggest that ESG mutual funds in the portfolios of Italian retail investors have performed better than non-ESG mutual funds in the same asset class on average.

Fig. 2 Average delta score between green and non-green companies identified among firms listed in the MSCI Europe Index

Fig. 3 Average delta score between ESG and non-ESG mutual funds investing in Equity Europe

*  Excluding mutual funds on the market before 2015. Source: Prometeia estimates based on Assogestioni, Morningstar, Refinitiv data and mutual funds information documents (for other mutual funds, sample of Italian mutual funds).

The results are consistent with Prometeia’s analysis carried out on the European stock market, where fundamental environmental data at company level are used. In particular, green companies among those listed in the MSCI Europe index were identified using clustering techniques applied to data extracted from non-financial information disclosed by companies and external reports.

Figure 2 shows how the average score of green companies is higher than that of non-green companies.

Figure 3 shows that the performance of the most recent ESG equity funds (post 2015), included in the previous analysis, are consistent with the evidence emerged from the environmental fundamentals of the companies. This does not apply to mutual funds already on the market since before 2015, which are likely to have been relabeled as ESG, without being so: this is the so-called ‘greenwashing’ risk.

It is therefore important that households maintain a selective investment approach and it is necessary that distributors always monitor the product range using up-to-date and objective information. Strong support in this regard is coming from European regulation.

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