Environmental, Social and Governance (ESG) investing has become very popular with institutional, family office and retail investors. In the UK, the range of ESG and sustainable funds for retail and high net worth (HNW) investors is still relatively small but growing fast.
Dr Jacob H Schmidt, Assistant Professor in Finance at Regent’s University London, and his co-author, Charlie McCann, have produced research into ESG Challenges in the Construction of UK Balanced Portfolios for Private Investors: An Analysis of the Availability and Performance of ESG Funds Across Various Asset Classes. The research paper was published in the Journal of Applied Finance & Banking, Volume 12.
The paper studies both the supply side and risk-adjusted performance of ESG funds for UK retail investors. Based on secondary data from the Financial Express (FE) Analytics database, the research finds that funds in the equity, bond and multi-asset sector are investable, from qualitative as well as quantitative perspectives. However, property, alternative and other asset classes are still underdeveloped.
Choosing ESG objectives has provided better risk-adjusted returns over the long-term for the retail investor, but with a tilt towards the quality growth factor, as ESG favours these sectors over typical old economy value. These findings are robust with top quartile rankings and the consistently higher Sharpe ratios over a 3-year period for the equity sectors.
Due to the scarcity of bond funds and other diversifiers, portfolio construction is constrained. The research predicts that over time, availability of ESG funds in alternative asset classes will grow in line with demand.
Overall, the research finds that based on secondary fund data, ESG funds in the equity, bond and multi-asset sector are investable, from qualitative as well as quantitative perspectives, but property, alternative and other asset classes are still underdeveloped.
Read the full paper here.