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No Long-term Performance Trade-Off for ESG Investors

In a new report, investment data and research provider Morningstar found no “performance sacrifice” over the long term, despite concerns about potential trade-offs when investing in ESG-labelled funds. Examining the performance of ESG funds across 17 European Morningstar Categories over the short, medium and long term, the report saw no performance trade-off on average, with the average ESG fund outperforming traditional counterparts over three, five, and 10 years. In the short term, ESG funds may lag behind traditional funds due to structural biases, Morningstar said. In 2022, characterised by rising inflation and interest rates, only 40% of ESG funds in the sample outperformed their traditional peers. Notably, ESG funds in certain equity categories showed improved success rates toward the end of the first quarter of 2023. The report also indicated that the odds of selecting a winning ESG fund with higher excess returns relative to traditional peers increase as the holding period extends. Nevertheless, the recent proliferation of ESG funds may decrease the likelihood of picking a winning and surviving fund going forward. Hortense Bioy, Global Director of Sustainability Research at Morningstar, said: “Trade-offs and performance of ESG investments will continue to be debated and researched. But what we found again by analysing ESG funds in the most popular asset classes is that there is no performance trade-off over the medium and long term. That’s important for sustainability-oriented investors because of the persistent perception that ESG-based investing requires a performance sacrifice.” 

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