Green funds might be saving the world – but here’s why they’re failing investors

green funds might be saving the world – but here’s why they’re failing investors

Wind turbine green ethical funds

The majority of professional “green” investors are falling behind the stock market this year, as sustainable funds fail to protect investors’ money from volatility.

Over three-quarters of sustainable funds failed to beat their benchmarks, according to the data provider Morningstar. It found that the proportion of lagging sustainable funds has been steadily increasing since the pandemic: a third underperformed in 2020, rising to 45pc in 2021, and 79pc in the year to date.

The worst performer this year was the Baillie Gifford Health Innovation fund, which invests in global health companies. It has fallen 24 percentage points behind its benchmark, the MSCI World Health Care Index.

The L&G Future World Sustainable and the EdenTree Responsible & Sustainable UK Equity funds ranked second and third in the table of worst performers, falling 23 percentage points and 21 percentage points respectively behind their benchmarks.

A spokesman for Baillie Gifford said that the fund had suffered from a market-wide move away from expensive fast-growing stocks that featured heavily in its portfolio. “We ask investors to judge us over a five and preferably 10-year period,” the spokesman said.

“At the moment, we are seeing a marked dislocation between share price and corporate progress of many growth stocks. At some stage this will change, and valuations will again begin to reflect the worth of exceptional growth businesses.”

A spokesman for EdenTree said: “We remain focused on investing sustainably and responsibly.”

A spokesman for L&G said its fund has been “challenged during this part of the cycle by the current market volatility. A considerable part of this has been driven from our asset allocation, away from energy, commodities and tobacco, areas we typically avoid.”

He added: “We continue to believe there is still significant long-term potential for the fund and our investors.”

Fund house Columbia Threadneedle had the highest number of underperforming green funds in the year to date, with 10 failing to match their benchmarks.

The worst performer among them was the Columbia Threadneedle Responsible UK Equity fund, which has lost investors a tenth of their money so far this year, while the FTSE All Share, which tracks all the companies listed on the main market in London, has dropped by just 3pc. A spokesman for the firm said: “While some of our funds have underperformed so far this year, we have an absolute belief in our ability to add value for clients.”

Boya Wang, of Morningstar, said that while the market rotation away from growth stocks this year was partly responsible for poor performance, structural issues in the industry have made it increasingly difficult for fund managers to outperform.

“The definition of environmental, social and governance continues to change,” he said. “Just a few years ago, sustainable investing was a relatively new concept and there was much less competition.

“Now there are more green funds, managers are trying to find new ways to differentiate themselves. For example, a few years ago a green fund manager might exclude a company from their portfolio because it was too carbon intensive.

“But investors are realising that some of the major contributors to climate change mitigation come from the energy companies themselves. And some of the technology to combat climate change can be very carbon intensive, such as the manufacturing process for wind turbines, but some green investors are willing to accept them because their potential contribution is huge.”

The number of funds going green is also growing at pace, as managers seek new ways to justify higher fees to cost-conscious DIY investors. Just three funds rebranded as sustainable in 2019, but this spiked to 24 in 2020 and 22 in 2021. The industry is on track to match this figure this year, with no fewer than 11 investment funds rebranding as green or taking on a sustainable mandate in the first half of 2022.

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