ESG funds and sustainable investing outperform traditional funds, report says

By Sunayana Thawait

June 10, 2024, 8:49 pm SGT

2 min read

ESG

Environmental, social, and governance (ESG) investing surged in popularity among investors and the public from 2017 to 2022 but has recently encountered criticism from certain quarters.

A new report by the Institute for Energy Economics and Financial Analysis (IEEFA) reveals that, despite perception challenges and regional differences, these investments have outperformed traditional funds and exchange-traded funds (ETFs).

Ramnath Iyer, Sustainable Finance Lead, Asia, at IEFFA and author of the report, said, “Sustainable funds generated better returns than traditional funds in 2023, with a median return of 12.6% versus 8.6% for traditional funds. This outperformance was extended across both equity and fixed-income fund asset classes.”

The report highlights that regulators continue focusing on climate change risks and improving standards and disclosures to assess and mitigate these risks. Europe, the most advanced regionally in embracing sustainable funds, saw an inflow of almost $11 billion into this asset class in the quarter that ended in March 2024.

The most notable difference between the investment exposures of sustainable funds and traditional funds is that sustainable funds tend to underweight the energy sector. IEEFA says investing in traditional energy companies with fossil-heavy portfolios has generally been unprofitable for investors, except during rare events.

Iyer added, “Asset owners are integrating ESG more, not less. Given their need for long-term performance, large asset owners understand the importance of incorporating sustainability outcomes into investment analyses and are likely to continue doing so.”

The report adds that there are clear signs of greater regulatory support in Europe and many Asian countries, which should see climate, sustainability, and ESG policies being further adopted by the mainstream. According to Iyer, “Any fund house that intends to be a global player must adapt to this shift, including those in the US, despite any internal debates.”