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Portfolio > Portfolio Construction > ESG

ESG-Focused Funds Are Outperforming During Pandemic

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Even in the midst of the coronavirus pandemic there are silver linings, among them a decline in air pollution due to a drop in driving, flying and industrial activity and better performance by  mutual funds and ETFs focused on environmental, social and governance (ESG) factors.

According to S&P Global Market Intelligence, funds that invest in companies based on their ESG ratings have functioned as “relative safe havens in the economic downturn caused by the coronavirus pandemic.”

S&P Global Market Intelligence analyzed the performance of 17 exchange-traded and mutual ESG funds with more than $250 million in assets year-to-date through May 15, and 14, or 83%, outperformed.

Two of the 14 posted slight gains — Nuveen Winslow Large-Cap Growth ESG Fund (NVLIX) and Brown Advisory Sustainable Growth Fund (BAFWX) — and 12 declined less the the S&P 500, which fell 11.4% during the time period studied.

Why the Pandemic Is Increasing Demand for ESG 

The coronavirus crisis is likely to focus investors’ attention on the social component of ESG analysis — how companies treat their employees and on the value of supply chains in countries with more transparent governments, according to S&P Global Chief Financial Officer Ewout Steenbergen.

“The acceleration of ESG will only continue and certainly, the current environment will help with that,” he said.

Jon Hale, Morningstar’s head of sustainability research, agrees. In a report released in early April, he noted that companies focusing on their long-term impact on stakeholders rather than on short-term performance “will be the ones remembered for helping us get through this crisis, and demand will grow for others to follow suit in the future.” 

Hale explained that outperformance of many sustainable funds in the first quarter reflected not only their stronger ESG ratings but their lower weightings of energy stocks and heavier weightings of tech stocks.

Year-to-date through May 20, the S&P 500 ESG Index (which excludes companies involved in the tobacco industry and controversial weapons as well as companies with low ESG scores relative to their industry peers and not in compliance with the UN Global Compact), is down 5.83% compared with 7.29% for the S&P 500. Over the one-year period the spread was even wider, with the S&P 500 ESG up 9.62 versus 6.74% for the S&P 500.

The growing popularity of ESG-focused investing has led MSCI, a leading provider of investment indexes, to make public its ESG ratings for 36,000 multi-class mutual funds and ETFs as well as the ESG metrics it uses for all its indexes. In November MSCI released its ESG ratings for over 2,800 issuers. 

“We are firm believers that enhanced transparency and comparability is fundamental to ensuring broader adoption of ESG indexes, and in driving capital towards more sustainable investment,” said Remy Briand, head of ESG at MSCI, in a statement.

In another indication of the growing popularity of ESG-focused investing the CAIA Association, a global credentialing body for alternative investments, has added a new ESG-focused module to its Fundamentals of Alternative Investment certificate program. The module is designed to provide asset managers, accounting professionals and financial advisors a working knowledge of ESG investing.

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