ESG ETFs Continue Proving Their Mettle | ETF Trends

Environmental, social and governance (ESG) ETFs, such as the FlexShares STOXX US ESG Impact Index Fund (CBOE: ESG) and its global counterpart, the FlexShares STOXX Global ESG Impact Index Fund (CBOE: ESGG), proved their mettle again in the second quarter.

ESGG is based on the STOXX Global ESG Impact Index, which screens companies scoring better with respect to a select set of ESG key performance indicators (KPIs), with the bottom 50% of such companies based on their ESG KPI scores excluded from the Index, as are companies that do not adhere to the UN Global Compact principles, are involved in controversial weapons or are coal miners.

“After showing greater resilience than conventional funds when stocks plummeted in the first quarter, sustainable equity funds available to U.S. investors more than held their own during the second-quarter rebound,” said Morningstar analyst Jon Hale in a recent note. “Most sustainable funds finished in the top halves of their Morningstar categories for the quarter, and 18 of 26 ESG-focused index funds outperformed conventional index funds that cover the same parts of the market.”

Good Times For ESG Funds

Environmental, social, and governance (ESG) investing has proven its mettle in the face of the Covid-19 pandemic, which can only bring wider adoption to a space that was already gaining in popularity.

Global investment firm JPMorgan has been effusive in its praise for ESG, comparing its resilience against Covid-19 to other major recessionary events that racked the capital markets in their own respective way.

As more investors look to ESG investing strategies, one should compare how it is different from Socially Responsible Investing or Impact Investing and consider an ETF strategy to effectively integrate ESG into a diversified portfolio.

“For the year to date, an impressive 72% of sustainable equity funds rank in the top halves of their Morningstar Categories and all 26 ESG (environmental, social, and governance) index funds have outperformed their conventional index-fund counterparts,” according to Hale.

Importantly, funds such as ESG and ESGG weren’t hamstrung by their lack of energy exposure even as the sector rallied in the second quarter.

“After clearly outperforming their peers on a relative basis in the first-quarter downturn, the opposite might have been expected in the second, as stocks posted their best quarter since 1998,” notes Hale. “This expectation was bolstered by sustainable funds’ tendency to underweight energy, or to avoid the sector altogether, which helped first-quarter returns to some degree because energy stocks were among the worst performers.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.