Data confirmed ETFs following environmental, social and governance (ESG) investing principles performed noticeably less poorly than cap-weighted during rough first-quarter stocks. Data also confirmed advisors and investors were responsive to that trend.

That theme could benefit funds 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).

“Despite the sudden descent of equities into a bear market halfway through the quarter, estimated net flows for the 314 open-end and exchange-traded sustainable funds available to U.S. investors reached $10.5 billion in the first quarter, easily eclipsing the previous quarterly record set in 2019’s fourth quarter,” said Morningstar analyst Jon Hale in a recent note.

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 Stands Out

“The global pandemic did have an impact, as flows moderated over the course of the quarter. In January, flows were $5.2 billion, an all-time monthly record. In February, flows cooled to $3.7 billion. And in March, which began with the market meltdown more than a week old, flows slowed further but remained positive at $1.6 billion,” according to Hale.

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.

When covering ESG investments, the environmental aspect includes attributes like climate change, natural resources, pollution, waste management, and other environmental opportunities. The social aspect incorporates human capital, product liability, stakeholder opposition, and other social opportunities. Lastly, the governance aspect covers things like corporate governance and corporate behavior.

“Among sustainable U.S. equity funds, passive funds garnered an overwhelming 94% of flows, while, unlike active funds overall, active sustainable funds managed to remain in positive flow territory,” writes Hale. The story isn’t quite as extreme for sustainable international-equity funds, where passive vehicles attracted about 75% of flows and active funds also saw positive flows.”

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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.