Doubts about ESG funds aren’t slowing their spread

IF YOU buy a fund with sustainable, ethical or green in its name, are you really getting something different from everyone else? Or are you all too often getting much the same thing, just with a more compelling name? Is there an epidemic of greenwashing? The UK’s Financial Conduct Authority (FCA) has long suspected the latter – hence the introduction of new regulations that will come into force early next year around the labelling of funds.

The FCA was, as it turns out, quite right to be suspicious. A new paper from London Business School professor of finance Alex Edmans and executive fellow of finance Tom Gosling, Sustainable Investing: Evidence from the Field, delivers the evidence. Edmans and Gosling surveyed more than 500 equity portfolio managers running funds both focused on environmental, social and governance (ESG) factors and traditional ones in the US, UK and European Union; they questioned the extent to which the managers differ when it comes to incorporating environmental and social metrics into their investment decisions. The (fairly surprising) first part of the answer is that mostly they don’t differ much. The second part is that the FCA might actually be worrying about the wrong thing.

Given a list of factors (including strategy and competitive position, operational performance, governance, corporate culture and capital structure) that they felt might affect the performance of a firm, both sustainable and traditional managers put E (environmental) and S (social factors) last (by quite a long way).