The Envestnet Study looked at the returns of mutual funds net of fees for different deciles of performance, deciles are groups of 10 percent. In the graph, here Figure 1 from the study, you can see red lines and blue lines representing SRI or ESG funds and their vanilla counterparts, those funds that don't consider ESG parameters and there are differences in the green line. Generally speaking for every percentile here decile, the blue line is outside in the cone shape of the red line. It looks like generally speaking for performance that is higher at the top part of the graph, non ESG funds have outperformed ESG funds over the roughly 15-year time period of the study. That particular 15-year time period included multiple market cycles which is an important element when thinking about ESG investing. On the bottom side of the lines again you can see the blue lines being further out than the red lines indicating that ESG or SRI funds have had better cumulative performance and the cone shape is apparent very clearly when you look at the green lines in the center. It's important to say that the study carefully adjusted for what we call investment style using the Morningstar characteristics known as the Morningstar Style Adjustments. The code word in the industry for the style adjustments here for US equities are large-cap growth otherwise known as LCG, large-cap value known as LCV, LCC large-cap core, and then mid-cap core, mid-cap growth,, mid-cap value, and finally, small-cap core, small-cap growth, small-cap value. The dimensions characterize the investment style along with two-axis value versus growth and large-cap versus small-cap. Historically, this has actually been a very important calculation or adjustment to bear in mind in part because ESG investing if you think about it might involve a style characteristic. In other words, by being an ESG investor, it seems that again, at least historically, this has meant if you're a screening investor, sometimes screening out older style firms, industry-oriented firms or manufacturing firms or firms with heavy asset characteristics, that are often associated with value and not growth. To put it simply, it's easier to be an ESG investor by many accounts although not all by investing in Apple versus ExxonMobil. In addition, especially more than 10 or 15 years ago, some of the largest firms on Earth may have had negative ESG characteristics in the eyes of some. For example, large-cap companies like ExxonMobil which for many years was the largest firm on Earth might have been the target of negative screening or of other ESG activities including investor activism which is today a very important methodology for executing on ESG. To make a deeper point, ExxonMobil, if you start the calculation at the classical academic starting point of 1926 where certain datasets begin, created more value until the summer of 2016 than any firm enlisted US exchange in history. It's important to contemplate that when we're thinking about negative screening. The largest firm on Earth and one that created more value than any other firm up until that point would often have been screened out by those with sustainability goals or screened-in by those who might have activist goals. Adjusting here as the investment study does is an important way to isolate those inherent style differences when we think about ESG investing. The net message in the graph is once again that for the highest performing mutual funds, historically on average, it looks like ESG focused or SRI screening funds underperformed or earned less adjusting for investment style. Whereas on the other side of the distribution for firms that are most poorly performing, ESG funds actually outperform. Finally, what about the average and perhaps this is really what many investors care about although the investors that we know about in the world have a hard time investing in the average fund because we have a hard time investing in all funds, what is the average result? You look very closely at the center of the graph you find that the average ESG fund does not indeed underperform the average vanilla fund or the non-ESG fund in the study. In fact, there's a slight out-performance owing to the better downside characteristics netted out against the upside characteristics. It looks in the study as though there's a do no harm notion in the data, of course, any individual circumstance can be dramatically different. The message when looking across the dimension of time is once again that upside and downside performance cumulatively is associated with ESG holding investment style constant. The next question though is what do we see during specific periods in which we have bull and bear markets historically? We see from the investment study in Figure 3 an answer to this question for the same time period of the previous analysis. While the analysis ends only in 2013, it covers again multiple market cycles such that we can disaggregate the time periods. The way this is done is first to consider an overall period which you can see here in the blue but then this aggregates the time periods into really interesting historical ranges where there's dispersion in market performance. You can see here 1999-2001, the end of the period, some call the technology growth period or the technology bubble in the '90s, 2000-2004, 2005-2007, the time period where we saw significant starting volatility in the market from the great financial crisis. Then we see 2008-2010, a period where the market saw their nadir in the first quarter of 2009 and then finally post-financial crisis 2010-2012. Now what the figure presents in examining the cross-sectional difference of ESG and non-ESG here specifically focusing on SRI and non-SRI mutual funds and also once again adjusted for investment style inherent in value growth characteristics and small-cap versus large-cap characteristics is consider the simple differences for those categories. In other words, according to the performance group again known as deciles, here 1 through 9, the vertical axis characterizes the difference between screening funds and non-screening funds or SRI versus non-SRI across those deciles. Consider the blue line. What it says is for overall time periods, the lowest performers saw ESG outperforming by almost 50 basis points or 0.5 percent. As you go from left to right from the first to the ninth decile where the ninth decile incorporates the highest performers, the ESG investments seem to have events historically almost diametrically opposite numerically speaking negative performance, again almost a negative 50 basis points. Some in the profession may call this something akin to alpha or the outperformance or underperformance of investments relative to their style or relative to the market. The takeaway is, for the lowest-performing funds ESG is outperformed, but for the very highest historical performers, ESG investing might have underperformed, and of course that could be due in part to simply less skill or as it's likely, potentially higher fees. In addition, if we look at the dis-aggregate time periods for instance in the 2000-2004 time period where we saw the turn of the century market drawdown, especially when times were bad, the poor performance saw ESG funds dramatically outperforming those that are non-ESG in orientation by about 100 basis points or a one percent difference. Again almost diametrically opposite or equal on the numerical basis for the ninth decile, ESG investments appear to underperform for the highest performers especially during the bad times. Finally, let's look at the other extreme, the rebirth of the bull market in US equities the period 2010-2012. The line flattens from the lowest performance decile, decile 1 to the ninth decimal that's in the dark line at about 25 basis points. The takeaway is that ESG underperformance on the highest side and outperformance on the lowest side appears to be associated with the market cycle. What does it say on average? Well, finally consider the fifth decile which is the median. If you look closely, it looks that on average contrary to the perhaps knee-jerk reaction of some but also perhaps the legitimate reaction of some especially when they consider that some ESG funds charge more than non-ESG funds, it looks as though there's almost no difference. In other words, at the fifth decimal we see zero or in fact, if you look really closely slightly positive outperformance of the ESG SRI versus non-ESG non-SRI. The do no harm principle that lies at the heart of fiduciary responsibility may be relevant here. Of course, it's not only a single duty that fiduciaries have to consider relative performance, they have to consider motive and many others. But it does seem that being an ESG investor on average may not necessarily cause harm financially. Even if it did induce a cost for investors who are their own fiduciaries in other words investing on their own behalf it may not even matter because they may gain a non-pecuniary benefit. But what the graph suggests is that good and gold may go together.
