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Sustainable Investing

Investors Who Commit to ESG Are Performing on Par

A PitchBook analysis of PRI signatories’ funds shows their returns look competitive.

An illustrative representation of Morningstar's guide to ESG.

Do environmental, social, and governance-focused funds return less than conventional funds? Some critics say so, but the latest evidence shows that’s not the case.

That’s according to recent PitchBook research (a Morningstar company), which looked at so-called private funds, which invest in things like private equity, private debt, real estate, and real assets. Specifically, PitchBook looked at funds run by firms that promised to follow a certain set of ESG principles by signing the Principles for Responsible Investment. Such funds, the PitchBook research found, performed as well as their non-ESG-aligned peers. The study, “Are ‘ESG Investors’ Underperforming?,” was written by a team of analysts led by Anikka Villegas.

The findings run contrary to the beliefs of some ESG critics—that investments driven by ESG factors can result in lower returns for limited partners, or LPs, who are investors in these private funds. Some of those critics accuse ESG-aligned general partners, or GPs, who manage the fund’s daily operations, of breaching their fiduciary duty to their LPs, Villegas added.

“There are some asset managers that have expressed concern around advertising their commitment to ESG or their use of ESG strategies or consideration of ESG factors,” Villegas said. “And this allows them a little bit more leeway, or comfort, in publicly making those statements.”

The findings also show little support for the opposing theory that investing with ESG principles can improve long-term fund performance by cutting back on some material risks.

The note’s authors focused on GPs who have committed to the Principles for Responsible Investment, a list of voluntary aspirations created in part by the United Nations in 2005. They analyzed performance data for all funds raised by the PRI signatory GPs—of which there are about 2,000—with vintages between 2010 and 2018.

ESG Investors' Private Funds Balloon in Number

Funds raised by Principles for Responsible Investment signatories.
This is a bar graph of how ESG investors' private funds have ballooned in numbers.
Source: PitchBook. Data as of Dec. 31, 2022.

A regression analysis by PitchBook found that the PRI signatories’ funds performed about the same as nonsignatory funds, regardless of strategy: private equity, venture capital, real estate, real assets, or private debt.

As tallies of ESG-diehards go, the PRI signatories list is useful but still imperfect, the authors note. Signatories commit to applying the ESG principles only to at least 50% of their assets under management, so some of their funds may make investments that fly in the face of ESG standards.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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