Annual performance in comparison: ESG funds hold their own – but with skid marks
According to the latest analysis, investment funds and ETFs with a sustainable orientation that are authorised for distribution in Switzerland have survived the 2022 stock market year relatively unscathed. The gap between non-ESG and ESG investments has been primarily sector-driven over the past 12 months. However, performance divergences of ESG funds within asset classes are similarly large as for non-ESG investments.
The at times turbulent stock market year of 2022 also left its mark on the performance of various ESG funds. According to the research analysis of the Swiss ESG portal Global Green Xchange AG (GGX), the fund vehicles dedicated to sustainability were not able to produce miracles compared to conventional investment funds, but the relative return gap was mostly justifiable on average.
In particular, the sector performance of equity funds not following ESG criteria, namely energy (upstream, mid-stream, downstream), helped the segment of Article 6 funds for 2022 to perform relatively well compared to ESG funds in the form of light green or dark green offerings. In absolute terms, Article 6 sector funds generated the most attractive returns in 2022. The flagship SPDR S&P U.S. Energy Select Sector UCITS ETF, which is also authorised for distribution in Switzerland, achieved a net performance of 63.89% after costs, making it one of the high flyers in the conventional funds segment. The weakest performance was achieved by article 6 funds with a tech orientation.
In the case of ESG investment funds with a particularly strict orientation ("Article 9"), the exclusion of fossil energy companies in the portfolio construction had a negative impact on performance in the past year. As a result, 98% of the funds explicitly following sustainability criteria as an investment policy were in the red in terms of performance as of 31 December 2022. Very large differences in annual performance were seen in the segment of green bond funds, which are also classified according to Article 9. The range here was from -9% to -23%.
From a return perspective, the segment of Article 8 investment funds and ETFs was significantly more attractive in the 2022 annual report because it is broader in scope. These ("light green") vehicles take ESG criteria into account, but do not invest exclusively in sustainable target companies. This also had the effect in 2022 that, calculated over the entire 12 months in CHF, around two dozen funds out of 1,985 shone with a positive result. Quite similar to conventional investment funds or ETFs ("Article 6"), the performance divergences for ESG funds according to Article 8 were similarly large. For example, they ranged from -15% to -29% in the ESG tech sector funds segment.
"The energy sector effect clearly overshadowed ESG funds in terms of returns in the 2022 stock market year and set two wake-up calls: Sustainability costs returns in certain market phases but is highly likely to balance out over time. Furthermore, the portfolio context should be taken into account, i.e. energy-intensive problem sectors that are consistently implementing their climate transition should not be demonised per se in the overall allocation of assets," clarifies Martin Raab, Board Member and Head of ESG Research at GGX.
About the author
Martin Raab is a long-time investment professional, book author, and member of the Board of Directors of Global Green Xchange. He manages the ESG Ratings & ESG Data division. As one of the authors of the newsletter "Green Money" and of ESG Insights, he regularly analyzes and reports on various topics related to sustainability and capital markets.