ESG funds outperformed peers during Covid stress, finds Esma

Environmental, social and governance funds outperformed non-ESG funds during the market turmoil caused by the Covid-19 crisis, according to new analysis by Europe’s markets watchdog.

The European Securities and Markets Authority said the finding that active ESG funds performed better than non-ESG funds “adds to the active [versus] passive fund investing debate” for retail investors and could also help influence its work on sustainable finance.

The Esma report analyses the performance of 2,581 EU-domiciled Ucits funds from mid-February 2020 to the end of June 2020, when it said financial markets suffered from “an exogenous shock” that “affected the market as a whole”.

Esma found that active ESG Ucits funds outperformed non-ESG active funds during the first 10 weeks of the Covid-19 outbreak when much of the world rushed into lockdown.

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“Funds with a high ESG rating also reported higher returns over the whole period compared to funds with a low ESG rating,” said Esma.

The report also found that investors were interested in the sustainability characteristics of funds even during times of intense market volatility.

Many types of ESG funds also received higher net flows during the 2020 market volatility than non-ESG funds, according to Esma.

“ESG funds are associated with higher net flows during all periods except the recovery and funds with a high sustainability rating are associated with higher net flows during the stabilisation period.”

However, the watchdog found that there was “no statistically significant difference in net flows” between funds that employ exclusion strategies and those that do not.

The Esma report added that trying different methods to differentiate between ESG funds and non-ESG funds “sometimes led to different results” — a situation that it said was likely to improve once “the quality and quantity of data increases following the improvements in definitions and the regulatory efforts undertaken”.

The watchdog confirmed late last year that it would press on with its ESG fund name guidelines, despite strong industry opposition, after an amendment was tabled to Ucits and the Alternative Investment Fund Managers Directive.

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