Comparison of five-year returns and average costs suggests responsible investment funds have an edge
While detractors of ESG may believe that responsible investment leads to increased costs and worse performance for fund managers, a new study suggests that responsible investing is actually correlated with better results.
The study, conducted by CEM Benchmarking, looked at data encompassing pension funds, sovereign wealth funds, buffer funds, and others, and compared the performance of 42 signatories to the UN Principles for Responsible Investing over a five-year period with those of non-signatory funds. The funds studied covered four geographies: the U.S., Canada, the U.K. and the Netherlands.
“Almost half of the PRI signatories that participated in the CEM database were European funds, whereas more than half of the non-PRI signatories were based in the U.S.,” CEM noted.
PRI signatories tend to be larger than non-PRI signatories, the paper said. In Canada, PRI signatories were 10 times the size of their non-PRI counterparts on average, whereas the PRI funds in other regions are just five times larger on average than non-PRI funds.
On average, PRI signatories manage 35% of their assets internally, compared to 11% for non-PRI entities.
Looking at the five-year period ending in 2018, the researchers found that PRI signatories had a higher average net return, in terms of the local currency, in the U.S., Canada, and the U.K. In the Netherlands, PRI signatories had a slightly lower average net return.
The trend was similar when looking at the average net annual return, with all four countries showing broadly that PRI signatories tended to show better performance.
Some data points stood out for certain years – for instance, Canadian PRI signatories tended to represent large funds that outperformed in 2015 and 2018. Non-signatories in the Netherlands, the researchers added, were more often corporates whose larger fixed-income allocations were “focused on immunizing their liability.”
Looking at costs, the researchers found PRI signatories to have lower costs than their non-PRI counterparts on both an absolute basis and relative to a benchmark that adjusts for differences in the size and asset mix of each fund. While the average total investment cost for PRI signatories in 2018 was 44.8 bps, non-PRI signatories saw total costs of 52.1 bps on average.
“One reason PRI funds are lower cost on both an absolute and relative to benchmark basis is that they are more internally managed on average,” the researchers said. “Internal management tends to be lower cost than external management.”