Australian equity funds with higher responsibility investment ratings have been found to offer a better return for investors over those linked to more traditional indices.
According to the Evergreen Responsible Investment Grading (ERIG) Index, Australian equity funds with high responsible investment ratings have outperformed the S&P/ASX 200 Index over the past three years.
Evergreen Consultants CEO Angela Ashton said that navigating the universe of financial products in the space can be particularly difficult.
“The ERIG Index is emerging as an important guide in this task,” she said.
Launched back in August, Evergreen Consultants’ ERIG Index puts the emphasis on how fund managers approach responsible investing rather than assessing the responsible investing credentials of portfolio companies.
Funds are graded on seven capabilities: ESG integration, negative screening, norms-based screening, active ownership, positive screening, sustainability-themed investments and impact investing.
Once fully assessed, graded funds are then sorted into broader quartiles that measure their relative standing. To date, Evergreen Consultants have issued approximately 600 ERIG Index ratings – 115 of these have been Australian equity funds.
After fees, Evergreen Consultants found that Australian equity funds who ranked in the top quartile of the ERIG Index managed to outperform those on the S&P/ASX 200 Index by an average of more than 0.5 per cent a year over the past three years.
Ms Ashton noted that many first quartile funds outperformed the growth and value indices but underperformed when it came to the quality index.
“We found a small negative relationship between the outperformance of the first quartile funds and value, and no relationship to quality or growth,” she added.
Ms Ashton said that this negative correlation to growth is likely explained by energy, mining and banking stocks often being value stocks.
“These are often excluded from funds with high ERIG Index scores,” she said.
