Research Shows ESG Funds Have Potential to Outperform Conventional Funds

As sustainable investing continues to affirm its place among traditional strategies, many advisors assume that sustainable investing entails a trade-off in returns.

“The facts have been for a long time that sustainable funds, on the whole, perform just as well as any other type of funds,” Jon Hale, director of ESG strategy at Morningstar, said on “The Flexible Advisor” podcast. “Our recent sustainable funds landscape report found that of all the sustainable funds in the U.S. universal, 54% outperformed their category last year. On average, about 50% outperform a category average.” 

For the trailing three- and five-year periods, about 75% of sustainable funds in the U.S. outperformed their category peers. There’s a lot of evidence in this report that sustainable funds can perform at least as well as conventional funds, Hale said.

Public awareness around ESG issues has become increasingly commonplace, Hale said. “This is just where people are. People as workers and as consumers are holding businesses to higher standards. Why wouldn’t people as investors do the same? When somebody buys a consumer good, sustainability is not the primary reason. They buy the good because it offers a utilitarian benefit. But, with all things being equal, they’re saying ‘I want to buy the more sustainable version of this’. I think the same holds for sustainable investing. ‘I want an investment that’s going to help me reach my financial goals, but I’d like the more sustainable version, please.’”

FlexShares has five strategies in its ESG ETF suite that offer the building blocks of a diversified core portfolio for individuals or model portfolios. Together, they provide broad market exposure, the risk characteristics of core benchmarks, and holistic integration of key sustainability criteria, according to the firm. 

The three equity ESG strategies offered by FlexShares are the FlexShares ESG & Climate U.S. Large Cap Core Index Fund (FEUS), the FlexShares ESG & Climate Developed Markets ex-US Core Index Fund (FEDM), and the FlexShares ESG & Climate Emerging Markets Core Index Fund (FEEM)

The suite also includes two fixed income strategies: the FlexShares ESG & Climate High Yield Corporate Core Index Fund (FEHY) and the FlexShares ESG & Climate Investment Grade Corporate Core Index Fund (FEIG).

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