U.S. Public Equity ESG Fund Composite and Parnassus Core Equity Fund: Performance and Factor Attribution

This is the first paper to examine all U.S. public equity Environmental, Social, and Governance (ESG) funds offered by the Forum for Sustainable and Responsible Investment’s (SIF) institutional member firms from 2005 to 2020. For ease of communication, this will be called the ESG Composite. With a Net Asset Value (NAV) over $150 billion, these funds comprise nearly half of the U.S. public equity ESG investment landscape. The article finds that the ESG Composite maintains performance with the Standard and Poor’s (S&P) 500 total return index on an overall returns basis with lower volatility, indicating greater risk-adjusted returns. Factor analysis reveals that the ESG Composite returns are primarily driven by underleveraged exposure to market returns as well as prevalence of mid-to-large cap and high beta stocks. When isolating the largest fund in the ESG Composite — the Parnassus Core Equity Fund (PRBLX) portfolio — this study finds significant outperformance over the S&P 500 on an overall returns basis. Factor analysis reveals greater emphasis on underleverage to the market and greater preference for large cap, high beta stocks. When compared to the global mutual fund universe, the ESG Composite outperforms in annualized returns and Sharpe ratios, whereas the PRBLX portfolio outperforms in annualized returns, annualized Sharpe ratios, annualized alphas, and annualized information ratios. Conclusions drawn from this study will (1) supplement the discussion on ESG usefulness and (2) present actionable investment insights.