ESG ETFs Answering Important Question This Year | ETF Trends

Environmental, social, and governance (ESG) ETFs, including the FlexShares STOXX US ESG Impact Index Fund (CBOE: ESG) and its global counterpart, the FlexShares STOXX Global ESG Impact Index Fund (CBOE: ESGG), are answering some important queries this year.

Those include the ability of ESG strategies to deliver or perform less poorly than traditional benchmarks when markets soon. Data suggest ESG is coming through for investors on that front.

“During the late-2018 stock market decline, for example, ESG funds proved more resilient than most funds,” according to new research from Morningstar. “Then came the spread of COVID-19 and some of the most volatile conditions in stock market history. During the market turmoil, returns on many ESG funds proved to be more buoyant than those on comparable non-ESG funds.”

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.

ESG ETFs Proving Their Worth

“While some of that outperformance is attributable to ESG funds’ significant underweighting of energy stocks–a group pummeled by the plunge in oil prices–the first quarter was just the most recent, and extreme, an example of ESG funds performing better during down markets than their non-ESG peers,” notes Morningstar. “If ESG funds can show a broader benefit to a portfolio besides aligning with the investor’s values, that’s a win-win situation.”

It’s been a decade of strong performance for environmental, social, and governance (ESG) investing when compared to the broader market. Data provider Morningstar research noted that European-based ESG funds have outperformed conventional funds in various timeframes—on, three, five, and 10 years.

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. ESG funds also offer favorable volatility traits.

“At a broad level, the story was consistent: In the past one-, three-, and five-year periods, ESG stock and allocation fund strategies lost less money than non-ESG funds during market declines and displayed less volatility. Among 11 Morningstar Categories, the average down capture for ESG funds through the year ended March 31 was nearly 12 percentage points better than category averages,” according to Morningstar.

For more on multi-asset strategies, please visit our Multi-Asset Channel.

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.