Achieving two-digit returns with ESG criteria

An ESG (environmental, social and governance) approach has become a crucial aspect in asset management in recent times. This trend responds to two needs: on the one hand, it’s inevitably linked to a growing “green consciousness” in society which, in turn, is reflected in the commitments made by an increasing number of companies around the world.

On the other hand, it's a movement that’s also being pushed by institutions, and this accelerates change in companies. European regulations on mutual funds have undergone significant changes, with significant emphasis placed on the sustainable classification of investment vehicles and how this information is communicated throughout the chain to the investor.

This process is still evolving and pending greater coalescence at the legal level, although it already has fund managers “at full capacity.” So much so that, according to the latest data from the Inverco Observatory corresponding to October 2023, 95% of the managers operating in Spain have funds that pursue sustainability criteria.

“Green” regulations in Europe

Transparency and disclosure are core components for funds looking to adhere to these regulations. Generally speaking, they must be aligned with the Sustainable Finance Disclosure Regulation (SFDR), the European Union (EU) Taxonomy and updates to MiFID II, among others.

The Sustainable Finance Disclosure Regulation (SFDR) is one of the most relevant regulations and requires companies to disclose how they integrate sustainability risks into their investment decisions and advisory processes. Financial products are classed under the SFDR into three categories: Article 6 (standard ESG considerations), Article 8 (promotes ESG features) and Article 9 (sustainable investment objective).

The EU Taxonomy is broader and isn’t limited merely to mutual funds, as it’s also important when it comes to classifying ESG investment, given that it defines what’s considered a sustainable economic activity and helps determine when an investment can be classified as sustainable according to European Union standards.

MiFID II, although not ESG specific, has been updated to include sustainability considerations. It requires financial advisors and fund managers to consider their customers' sustainability preferences when recommending investment products, which has led to greater inclusion of these ESG criteria.

ESG and positive returns

As part of their commitment to environmental, social, and governance issues, managers also recognize the significant impact that these factors can have on the long-term financial performance of investments. And although some doubts remain concerning the risks of overpricing in sustainable assets that may arise from excess concentration, according to the Inverco report, it is possible to position yourself in investment vehicles with a green bias while obtaining even double-digit positive returns.

Two good examples are Mapfre AM Inclusion Responsable and Mapfre AM Good Governance funds managed by Mapfre Asset Management. Both funds have had a positive track record not only in 2023, but also in the longer term. Mapfre AM Inclusion Responsable ended last year with a return of 22%, while recording annualized returns of 8%. Mapfre AM Good Governance achieved returns of 17.6% in 2023 and remains positive after three years, with an annualized return of more than 5%. “We've managed to demonstrate that sustainable returns are not at odds with financial returns,” asserted Eduardo Ripollés, Head of Institutional Business and Sales at Mapfre AM.

This positive performance has attracted investors in recent years. Mapfre AM Good Governance, a global equity fund focused on investments that foster good corporate governance, was launched in 2017, and now has assets of more than 120 million euros. In turn, Mapfre AM Inclusión Responsable, on the market since 2019 and a global pioneer in its criteria to pursue the social and labor inclusion of people with disabilities through its investments, now exceeds 40 million assets under management. “Our investors are aware that the management team is strong, that both managers work as a team, that our methodology works, and that the database is updated regularly by the different investment committees,” adds Ripollés.

Technical data sheet

Mapfre AM Good Governance

With a risk of 4 out of 7 (as stated in the product's DFI), the focus of this fund translates into identifying and supporting companies that adopt transparent, ethical, and efficient decision-making practices. It also considers environmental and social criteria when building its portfolio.

By definition, it invests at least 75% of its net value in shares in listed companies with good corporate governance practices, with no geographical restrictions, and seeking diversification by sector. On December 31, 2023, the percentage of shares in the portfolio came to more than 95%. Europe accounts for 55.3% of the asset allocation, with the Eurozone accounting for 20.2% and the United Kingdom accounting for 18.49%. The US accounts for the remaining 44.67%. Concerning sectors of activity, the most significant allocation is in those sensitive to the cycle, with technology accounting for a significant amount (26% of the total). As regards cyclical stocks, financial services is the sector it’s most exposed to (16%), while the exposure to defensive stocks, consumer and health, is similar. The ten largest positions account for 38.66% of the assets: the top five includes Microsoft, Adobe, NN Group, ASML, and Finnish firm Neste.

The fund earned 5 stars from Morningstar in May 2023, and Mapfre AM is working to classify it as Article 8.

Mapfre AM Inclusión Responsable

Focused on the workplace inclusion of people with disabilities and on investing in companies with high ethical and financial standards, this equity fund follows a unique methodology in the sector, carrying out an exhaustive analysis of a universe of European companies and selecting only those that already have sound financial strength. The aim is to obtain above-market returns (the reference index for comparing returns is the Euro Stoxx 50 Net Return), at the same time as contributing to the inclusion of people with disabilities in the labor market.

The fund's management establishes that around 90% of the net assets will be invested mainly in equities of listed companies in Eurozone countries: on December 31, 2023, this percentage stood at 86.62%.

The sector allocation is mainly divided into three categories: cyclical (26.19%), cyclically sensitive (59.46%), and defensive (14.35%). Within these, the most prominent sectors are industry (29.30%), technology (20.01%), and cyclical consumption (13.39%). The ten largest positions account for 42.67% of the fund's assets and include ASML, L'Oreal, Deutsche Telekom, and Capgemini.

This product is classed as Article 8 and qualified as a “Socially Responsible Investment” (SRI). It has also been assigned 3 stars by Morningstar, which measures the risk-adjusted return of a given fund compared to its category, based on data from the last three years.