ESG funds, which promise to only invest in companies and other assets that meet their definition of ‘Ethical, Socially Sustainable & (good) Governance’, are outperforming the wider market according to new data from Morningstar. The fund and markets data company found that over 50% of investment funds that market themselves as ESG compliant have proven themselves more robust than stock markets as a whole.
While the MSCI World stock index, the broadest-based benchmark index covering developed market economies, dropped by a total of 14.5% over the course of March, 62% of ESG funds fell by less. Teodor Dilov, a fund analyst at investment platform Interactive Investor, told the Financial Times:
“It would be a stretch to say that ethical funds have been resilient to the sharp downturns in global markets, but they have fared better.”
Erika Karp, CEO of impact investment firm Cornerstone Capital, added:
“Telecommuting, distance learning, telemedicine, these trends are accelerating. Sustainable investors think about the future, investments they can make that will produce a positive social change. It’s natural that ESG would outperform.”
Sectors that attract ESG funds, particularly those with a heavy tech and digital influence, have been less affected by social distancing and lockdown measures introduced to slow the spread of the Covid-19 coronavirus pandemic. At the same time, ESG funds have benefitted significantly from not being invested in the oil and gas sector. Oil prices have plunged to lows not seen in decades as a result of a ‘perfect storm’ of slumping global demand for fuel and a price war erupting between recent oil producing allies Saudi Arabia and Russia.
The outperformance of ESG funds is seen even more starkly when they are compared to non-ESG alternatives. In recent years it has become popular for fund managers to offer ESG-versions of their main funds. These versions don’t invest in certain stocks the main fund does because they are not seen to meet strong ESG criteria. Interactive Investor data shows that slightly over 66%, of two thirds, of these funds have done better than their non-ESG ‘siblings’ since the beginning of the year.
And it’s not a track record that can be put down to only the Coronavirus-crisis. When extended back over 3 years, the percentage of ESG-versions outperforming the traditional funds they were spun out of, rises to 80%.
Morningstar’s Hortense Bioy, the company’s director of passive strategies and sustainability research, offer the explanation:
“ESG funds tend towards higher quality companies with a stronger balance sheet, companies that are run butter and operate more efficiently.”
The strong performance of ESG funds is being reflected in inflows, which a Bank of America report from last week shows have been net positive in each have experienced inflows for each of the last 10 weeks. That’s against the backdrop of a mass equities sell-off across the market. Over the past 12 months, ESG funds have added over $70 billion in capital under management.