ESG funds hold their own
Environmental, social and governance (ESG)-based managed funds are holding their own despite the current volatile market conditions, and may emerge at an advantage as a result of the Government's carbon tax policy.
That is the assessment of a number of analysts and managers in the ESG arena, with Dalton Nicol Reid (DNR) chief investment officer Jamie Nicol saying it is not necessarily a risk for an investor who has previously invested in traditional investment funds to move to an ESG-focused offering.
According to Responsible Investment Association Australasia's 'Responsible Investment Annual 2011' benchmark report, the average returns of 30 dedicated responsible investment (RI) portfolios outperformed the ASX300 accumulation index across Australian shares, international shares and balanced funds over one, three, five and seven-year periods up to June 2011.
Lonsec senior investment analyst Steven Sweeney believes that most retail fund managers, rather than incorporating a segmented ESG approach, "are not taking a large departure from established investment processes" but simply increasing their focus on environmental and governance issues.
"Given that an ESG assessment may bring heightened risk awareness, those products subscribing to this philosophy could prove a more secure investment option than one where the concept is less formalised," he said.
Sweeney was quick to point out, however, that an ESG assessment is not a magic cure-all. Investors are still exposed to share price disappointment, macro influences and unforeseen events such as fraudulent practices.
Perpetual responsible investment and sustainability manager Pablo Berrutti said that based on its own ESG-assessed broad-based managed funds, investor returns tend to be quite volatile.
For instance, some of Perpetual's ESG-based options do not allocate to resource companies because of a number of environmental concerns.
"During mining booms, such funds struggle to keep up with the market, but when resources pull back they shoot ahead," he said.
However, Berrutti said that over the medium to longer term the fund has performed as well or better than traditional funds.
Australian demand for ESG-assessed investment is still quite low, making up around 1.6 per cent of Australia's assets under management. Berrutti added that financial advisers had not recommended such options to clients because there needed to be more education on how ESG issues could affect returns over the short, medium and long-term.
The experts agreed that new environmental legislation - including the Federal Government's carbon tax, which is set to come into effect in July this year - is giving fund managers cause to focus more on sectors that invest in renewable energy at the expense of those companies that are heavy carbon emitters.
Sweeney believes fund managers who have been ahead of the curve in researching the economic and industry implications of a particular investment strategy may gain a comparative advantage.
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