New Research Finds Significant Performance Dispersion in the ESG Strategy Space

A new study from Singapore headquartered Scientific Beta, entitled “From ESG Confusion to Return Dispersion: Fund Selection Risk is a Material Issue for ESG Investors,” examines the performance dispersion of a set of ESG funds invested in US stocks.

The findings show substantial performance disparities in these ESG funds:

  • Over a six-year period, the difference in annualised returns between the best and worst ESG funds is 6.5% when adjusting for differences in market exposure.
  • When removing effects due to differences in industry exposure, the difference remains high at 4.9%.
  • Over single years, the dispersion can be even more dramatic, reaching a maximum of 22.5% in terms of returns adjusted for market exposures, and 25.3% in terms of industry-adjusted returns.

Commenting on the study, Felix Goltz, co-author, and Research Director at Scientific Beta, said: “The large dispersion in returns shows that fund returns are not principally driven by a common sustainability factor. Instead, fund returns largely depend on fund-specific choices of how to integrate ESG information.”

This suggests that ESG investors face substantial fund selection risk. Importantly, traditional fund selection strategies like relying on past performance or tracking error are inadequate for predicting future ESG fund performance.

“Our evidence emphasises that inconsistencies in ESG approaches contribute to significant dispersion in the performance of ESG investment products. Investors need to be aware that fund selection risk is a material issue for sustainable investment strategies,” Goltz added.