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Chapter 5Funds head-to-head

Chapter 5.1

Lose the “impact” in impact investing - ESG and “normal” funds compared

During the past couple of years, the so-called ESG (Environment, Social & Governance) and impact funds have enjoyed quite some hype and extra attention. Seasoned asset owners have seen it all marketed to them: funds with simple exclusions, funds with “catholic values”, funds with themes ranging from wind power to ending solitude.

But how to really know which funds actually have a net positive overall impact?

To help asset owners navigate the space and allow asset managers to continuously track and improve their funds, Upright has created a ranking of thousands of funds and asset managers based on their net impact. As a little sneak peek, below are the key findings from a selection of 25 global and US equity funds, which can also be downloaded in the Datasets chapter.

ESG funds are not always net positive

Investing in an ESG-themed fund does not guarantee a more positive net impact compared to investing in an ordinary fund.

Let’s look at concrete examples. An ESG fund by Swiss multinational investment bank UBS, UBS International Sustainable Equity Fund, has “a sustainable investment approach” according to its fund prospectus and is marketed with its impact. However, it’s net impact is only neutral. The fund includes companies such as e-commerce giant Alibaba, video gaming company Ubisoft, and consumer electronics conglomerate Sony, which all have limited positive impact compared to the resources they employ.

At the same time, Fidelity Contrafund, a fund mainly known for its stellar financial returns over the past decades and not marketed with impact, performs pretty well in net impact. Defined as a large growth stock fund, the Contrafund is one of the largest actively managed funds in the world. It includes plenty of more traditional stocks, such as Pacific Gas & Electric and Johnson & Johnson.

Comparing the two funds (Figure 5.1) shows significant differences in their value creation. While UBS International Sustainable Equity Fund manages to stay away from negative health impact more than Fidelity Contrafund, the Contrafund’s positive contribution to both health and knowledge outshine the ESG fund.

What is interesting is the ESG fund’s heavy burden on the environment, largely driven by oil & gas and automotive companies, such as Equinor and Mahindra & Mahindra.

UBS International Sustainable Equity Fund: 0%

Fidelity Contrafund: 21%

Figure 5.1.

The net impact of UBS International Sustainable Equity Fund compared to Fidelity Contrafund.

Let’s look at another example, this time from DWS (Formerly: Deutsche Asset Management), the largest asset manager in Germany.

The first compared fund is DWS ESG International Core Equity Fund. Its fund page states that “issuers are evaluated based on their performance across ESG criteria”, which does not say much about what the fund thrives to achieve in terms of impact. The second fund in comparison is DWS International Growth Fund, a fund investing in large cap growth companies.

Comparing the funds reveals differences in their net impact: most significantly, the ESG fund uses more environmental resources and causes more negative health impacts than the DWS International Growth Fund.

Looking deeper into the funds reveals the reasons for the differences: the ESG fund includes tobacco and alcoholic beverage companies such as British American Tobacco, Swedish Match and Heineken, leading to a negative impact on the health of people. The fund also includes companies that have a heavy burden on the environment. These include oil & gas, automotive, road & air transport companies, such as Sydney Airport and global automotive supplier Valeo.

DWS ESG International Core Equity Fund: 5%

DWS International Growth Fund: 25%

Figure 5.2:

The net impact of DWS ESG International Core Equity Fund compared to DWS International Growth Fund.

These examples illustrate that ESG funds are not automatically positive, and that “normal” funds can very well have above-average net value creation - regardless of the image the funds’ marketing materials or ESG metrics convey.

The key question is: How can asset owners look past the marketing materials and compare funds and asset managers in an efficient way?

Without objective and comparable data, asset owners can struggle to see the big picture of the impact of ESG funds.

Pursuing positive net value creation does not mean giving up financial returns

Traditional thinking implies that investors need to be willing to give up financial returns to achieve positive impact. To explore this, we compared the annualized five-year returns of the sample funds to their net impact.

Figure 5.3. The net impact ratio of the sample funds compared to their annualized returns over five years. The chart includes all funds from the 25 fund sample for which returns data was available from Morningstar.com.
Based on the comparison, it seems that the fear is not based on facts. Rather, the evidence even suggests that even the opposite might be true, as funds with positive net impact have performed well financially over the past five years. What does this mean for professional investors? Finding a systematic way to compare and track the impact of companies and funds, and integrating this to the investment approach, is not just something for the “ESG department”, but rather for the overall investment strategy.

Chapter 5.2

Good news for asset owners

Thus far, asset owners have been relying on impact data that answers a myriad of questions of varying importance - and is hardly comparable. Facts and anecdotes on gender equality, emissions, complying with international standards, human rights, compensation, PR crises and sustainability branding can easily bury the big picture under them.

Upright wants to challenge this by opening up its fund and asset manager database for asset owners. This is one concrete step in the right direction: ending the era of black-box ratings, talking bluntly about what companies actually do in their core businessand enabling asset managers to really understand what their money promotes in the world.

Analyze your funds as asset manager: