Out of nearly 600 ethically-focused funds, only 38 have made a positive return in 2022’s opening quarter, data from FE Analytics shows. 
The start to 2022 has been a challenging one, characterised by high volatility as investors eyed higher inflation and central banks commenced with their first interest rate rises in years.
This was all eclipsed by the devastating events in Ukraine as Russia invaded. This attack was denounced by governments globally and harsh economic sanctions were immediately placed on Russia.
Although these events may not directly impact environmental, social or governance (ESG) funds, since very few had an outright investment in Russia, the consequences of all these events have hit ESG portfolios hard.
Source: FE Analytics
Firstly, these types of funds tend to be more growth biased, since traditional value assets such as oil, gas and commodities, do not lend themselves to an ESG ethos. This style bias benefitted ESG and growth funds for many years when interest rates and inflation were low.
But now that this has started to shift, growth stocks have taken the main knock as these dynamics could act as a headwind to the potential future returns of these assets. Therefore, many ESG-focused funds have been caught up in the wider move away from growth and into value as investors tried position themselves on the right side of the inflation trend.
Secondly, the war in Ukraine caused a global increase in oil, energy and commodity prices as both parties are some of the main global suppliers of these assets. As mentioned, ESG funds typically avoid from this area of the market and therefore missed out on the recent rally.
As a result, most ESG portfolios have underperformed in the first quarter of 2022.
The table above shows the 38 funds which have made a positive return during that time.
The best performer overall was a passive option, the HAN AuAg ESG Gold Mining UCITS ETF, which made 15% in the first quarter.
Gold was one of the few commodities which rallied on the back of Russia’s attack of Ukraine, with the price of gold hitting $2,000 an ounce in early March. The asset has traditionally been regarded as a ‘safe haven’ in markets and has been highly sought out during recent periods of volatility.
Mining and ESG would appear to be an oxymoron but this index runs a variety of ESG exclusions and requirements, such as looking for compliance with the UN Global Compact agreement.
The ETF itself holds the 25 companies with the lowest ESG-risk scores from the index, with screenings done via Sustainalytics.
On the active side, the highest returning fund was the five crown-rated M&G Global Listed Infrastructure fund, with a total return of 6.3%.
Run by Alex Araujo and John Weavers since launch in 2017, the fund has some exposure to the utilities sector meaning it was able to benefit from the recent rise in those assets.
On the ESG side it has various policy exclusions, such as any stock generating more than 30% of its revenue from coal fired or nuclear power are excluded along with any companies involved in tobacco, alcohol, adult entertainment, gambling and controversial weapons.
Some more well-known funds managed to cut through the recent volatility, such as the VT Gravis Clean Energy Income portfolio.
The five Crown rated fund made 5.8% from January to March this year, achieved through investments in solar, wind, hydro, energy storage, energy efficiency, bioenergy, smart grid and geothermal pumps, all areas feeding into its namesake theme.
Will Argent runs the fund, as well as the VT Gravis UK Infrastructure Income fund and puts capital preservation at the core of his process. Investing in companies providing alternative to fossil fuels, holdings need to have an established track record of dependable cash flow as well achieving modest capital growth.
The iShares Global Clean Energy UCITS ETF made 4.4% in the opening quarter. The $6.1bn passive has been a popular option with investors as they have tried to tap into the renewable energy theme.
As mentioned though only a fraction of ESG funds were able to generate a positive return at the start of this year, with the majority unable to overcome the market headwinds.
Some of the most well-know, and previously best performing, ESG funds which struggled included Baillie Gifford Global Stewardship, which lost 15.5% in the first quarter. Liontrust Sustainable Future Global Growth was another, down 11.8%, and Pictet Global Environmental Opportunities lost 10.6%. All three funds hold a Crown rating of four or higher.