How ESG-focused trusts have performed since the Paris Agreement

We detail how ethically minded investment trusts have fared since April 2016. 

This is the first article in a three-part series. Parts two and three will analyse how funds and exchange-traded funds (ETFs) have fared since the Paris Agreement was signed in April 2016. 

News over the past week has been dominated by the COP26 meeting in Scotland. World leaders have assembled to try to come up with some sort of international agreement on how to avert or mitigate climate change. A lot of this has entailed commitments to phase out the use of carbon-based energy to reduce or limit temperature rises.

These targets will require huge expansion in the use of so-called clean energy. The hope is that government targets will force the transition from a carbon-dependent economy to one making use of more environmentally friendly forms of energy.

• ii COP26 hub: see tips, news, comment and analysis from our experts
• ESG funds have outperformed over three and five years
• Tom Bailey: the two theories driving ethical ETF demand

As regular readers will be aware, such a transition will have an impact on financial markets. First, in theory, it means that owning companies dependent on the sale or heavy use of oil and other fossil fuels will become less attractive. If governments do severely curtail the use of fossil fuels, the share price of such companies should be hurt. As a result, many now see ESG-screened funds, which reduce exposure to the worst polluters, as a potentially better way to invest.

On the other hand, if governments do wish to transition to less carbon-intensive economies, this will require massive investment and expansion of green and clean forms of energy such as solar, wind and battery storage. 

So, understandably, the events of the past few weeks have put ESG funds and trusts firmly in the spotlight.

But COP26 is not the first time that international leaders have met to agree on some sort of emissions limit target. In 2015, world leaders met and negotiated the Paris Agreement, which was signed in April 2016. The agreement was a long-term temperature goal of “well below” 2 °C, and preferably limiting the increase to 1.5 °C.

So, how have ESG-focused investment trusts fared between the signing of this agreement and now?

To find out, we looked at the ethical investment long list, which is a list of all funds, investment trusts and exchange-traded funds available on the interactive investor platform that have some form of ethical, social or governance bias. For the list, interactive investor works with industry experts at SRI Services to help confirm and classify relevant funds.

Given that we have looked out how trusts have fared over a five and a half year time period there’s only a small number that have that long a track record – 10 in total.

Of those 10, just one trust on the list that was in existence at the time of the signing of the Paris Agreement has outperformed the global stock market. But, as we explain in a moment, this is not something that’s worth writing a negative headline about.  

Between 22 April 2016 and 31 October 2021, the Impax Environmental Markets (LSE:IEM) provided a return of 221.5%. In contrast, the MSCI All Country World Index, was up by 111.7%.

The other nine trusts underperformed that benchmark. Jupiter Green (LSE:JGC) was the next best performer, returning 92.2%, followed by Menhaden Resource Efficiency (LSE:MHN) and Pacific Assets (LSE:PAC), with gains of 91% and 78.5%.

• Less than 1% of fund assets aligned with climate agreement
• Want to invest ethically? ii’s ACE 40 list of ethical investments can help

Now for the caveats. First, we have used the MSCI All Country World Index as a benchmark, as the closest representation of the global stock market. However, this is not the chosen benchmark of many of the trusts. With some justification, they would contend that it is an unfair comparison, as they are investing in a very different substrata of assets.

In addition, the past decade has been characterised by the continued outperformance of large-cap US stocks, particularly tech companies. These companies have seen their weighing in the world index increase. These tech giants may be found in ESG-screened funds. However, the sort of trusts examined are primarily those that invest in renewable energy. Being unable to beat the US large-cap and tech-heavy index is hardly unique to these trusts.

Does this bode badly for the hope of such trusts after the COP26 agreement? Not necessarily. It could be argued that the world took the commitment reached in 2016 less seriously than now. The US briefly removed itself from the Paris Agreement under President Donald Trump, while the US administration, for now at least, is much more committed to supporting decarbonisation.

However, this should serve as a reminder to investors that there are many variables influencing asset prices and returns. The world may increasingly be committed to clean energy, but other factors can always end up influencing the price of other stocks and assets, affecting relative performance.