How ESG Funds Have Been Outperforming the Market
The coronavirus pandemic has had a devastating impact upon the world’s financial markets, but there is one sector that has fared better than most: funds that are focused on environmental, social and governance (ESG) strategies. These funds look to invest in quality companies that are also socially responsible, and that they are doing well is not by accident, nor should it be considered a short-term trend.
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While you have a myriad of good investment options available to you, ESG investing, which has been growing in popularity in recent years, is one of the more interesting and promising ones. This article describes what ESG investing is, how and why ESG funds are currently outpacing other sectors, their future outlook and how you can take advantage of this trend.
ESG investing is different than traditional forms of investment in that the focus of investors goes beyond financial factors such as growth potential and risk. These additional factors relate to whether a company’s activities are having a positive impact upon the world. This impact can take shape in various forms, such as environmental sustainability, how it treats its customers, employees and community, and how it is structured to both encourage openness and prevent corruption.
In essence, investors are looking for companies that not only perform well but also act well.
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Prior to the coronavirus epidemic, ESG funds had not only been growing tremendously, they had also been less volatile than standard funds.
During the coronavirus pandemic, the performance of ESG funds has been dramatic. In March of this year, Bloomberg looked at close to 3,000 ESG funds. They found that about 400 of them produced a positive return for the year even before the stock market began to rebound. Close to 50 of these even managed to produce gains of 10% or more.
Although Bloomberg also found that the average ESG fund at the time had lost 12.2% since the beginning of the year, this represented about half the decline of the S&P 500 over the same period. An analysis from Morningstar further backed these findings. They found that 24 of the 26 ESG funds that they looked at performed better than comparable non-ESG funds during the crisis.
Numerous factors can be credited for this performance. This includes better risk management among the companies within the funds’ portfolios, less exposure to companies related to or reliant upon fossil fuels, and a general interest among investors to support companies that are doing their part in trying to heal the world.
Some may be concerned with how ESG funds will perform once the pandemic is over, especially as, in the past, these funds have only outperformed standard funds in the aftermath of crises and during years in which the stock market was experiencing a downturn. But we may find ourselves in a world that has fundamentally changed forever.
Some now see ESG investing as a mega trend. Steen Jakobsen, who is the chief economist of Saxo Bank, has said, “For the first time since World War II we sense a shift in which climate and the environment — not growth — will become the priority of governments and their citizens, as shortages of food, clean water and air become existential questions.”
You can take advantage of the trend toward ESG investing by selecting from the large number of ESG funds that are available. They come in the form of both mutual funds and exchange-traded funds (ETFs), with some being passive index funds that build their portfolios based on established ESG rankings and others being actively managed.
There are also many types of ESG funds to choose from. There are broadly diversified funds as well as those that focus on either large or small companies. There are further funds that invest in foreign countries and those that operate specifically in emerging markets.
You can additionally invest in ESG funds that focus on specific interests, such as climate change or the conservation of important resources.
There are very real reasons why ESG funds are performing better than other sectors during the pandemic. What’s more, there are good reasons to believe that this trend will continue even after the current crisis has subsided, making it an attractive investment option to consider.