To establish just how different portfolios of ESG funds are from conventional funds, we combed through two decades of funds’ holding data and scrutinised their exposure to investment styles (factors) and risk-adjusted performance.
Our conclusion? ESG funds are not really different from conventional funds in terms of holdings, risk exposures and therefore performance. This conclusion holds even for the subset of funds that changed their designation from non-ESG to ESG-focused2.
This reflects the fact that measuring a fund's ESG focus is everything but straightforward. There is a lack of consensus on how many and what aspects of E, S and G should be assessed in each relevant dimension, and as a result, different providers score ESG-related criterion differently. Additionally, many stocks, especially small caps, are not yet ESG-rated. What score to assign to these companies is an open issue and may affect the classification of ESG funds.
Beyond this, the overall ESG score of a fund is a composite of its individual E, S and G scores, but there may be little correlation between the individual pillars. A fund may have a high environmental impact score by overweighting low carbon emissions, but rate low on social impact, resulting in an average ESG score overall.