There are now over 830 registered ESG investment firms. These values-driven funds seek to balance financial returns with the longer term implications of a company’s environmental, social and business governance policies. The desire for these types of investments is steadily increasing. In 2020, the assets managed by these firms was $3.10 trillion, up 19 percent from 2018. And the number of individual investors that employed ESG-based strategies in at least a quarter of their portfolio decisions increased from 48% in 2017 to 75% in 2019.
In 2005, the UN Environmental Program commissioned a report that looked at the “prudent investor” laws of seven developed world markets, including the US, to determine if the incorporation of ESG strategies was prohibited by the management’s fiduciary responsibilities. They concluded that in the US, incorporating ESG values into a fund’s investment strategies consistent with fiduciary duty, and that ignoring these long-term risks might in fact be a breach of fiduciary duty.
Regardless of the demand and the legality of ESG focused investments, the question remains, “how do ESG funds perform in the marketplace?” Are ESG based investment strategies merely a feel-good proposition or do they have real financial value as well?
As noted by Morningstar, for 2020 overall, 11 of 12 sustainable equity funds beat the S&P 500 index fund, led by IQ Candriam ESG US Equity ETF (IQSU) and Calvert US Large-Cap Core Responsible Index (CISIX), both of which are based on proprietary ESG indexes. The 22.4% average sustainable index fund return easily beat iShares Core S&P 500 ETF (IVV) 18.4% return for the year. [1]
JUST Capital ranks companies based on factors such as whether they pay fair wages or take steps to protect the environment. It created the JUST U.S. Large Cap Diversified Index (JULCD), which includes the top 50% of companies in the Russell 1000 (a large-cap stock index) based on those rankings. Since its inception, the index has returned 15.94% on an annualized basis compared with the Russell 1000’s 14.76% return.
These, and several other studies, document that ESG focused investments easily match or exceed the financial returns of more traditional investment funds. There is no demonstrable performance penalty associated with an investment strategy that includes ESG considerations. It is possible to do be both a responsible investor and to invest responsibly.
[1] https://www.morningstar.com/articles/1017056/sustainable-equity-funds-outperform-traditional-peers-in-2020
