Research Shows ESG Outperformed Broad Market Last 10 Years

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.

“Close to six out of 10 sustainable funds delivered higher returns than equivalent conventional funds over the past decade, according to a study that undermines claims that investing based on environmental, social and governance principles hampers performance,” a Financial Times article noted. “ESG funds have exploded in popularity in recent years as emergencies such as climate change have pushed individuals to invest according to their values. Despite this, debates have persisted over whether a link exists between investing responsibly and achieving outperformance.”

Given the latest data, ESG is making a name for itself as a performer as opposed to a niche-based investing fad. During the height of the coronavirus sell-offs, ESG was able to mute the effects of a sharp market downturn.

“The findings debunk the myth that there is a performance penalty associated with ESG investing,” said Hortense Bioy, director of passive strategies and sustainability research at Morningstar.

“ESG factors are not just ‘nice to have’ but drivers of outperformance,” said Jan Erik Saugestad, chief executive of Storebrand Asset Management. “It is both right and smart to exclude certain business practices in violation with well-recognized conventions or with inherently high risk and negative impact.”

Investors who want ESG exposure via an ETF wrapper can take look at the Xtrackers MSCI EAFE ESG Leaders Equity ETF (EASG). EASG seeks investment results that correspond generally to the performance of the MSCI EAFE ESG Leaders Index.

The fund will invest at least 80% of its total assets (but typically far more) in component securities (including depositary receipts in respect of such securities) of the underlying index. The underlying index is a capitalization-weighted index that provides exposure to companies with high ESG performance relative to their sector peers.

For ETF investors looking for ESG exposure within the fixed income asset class, they can look to the iShares ESG U.S. Aggregate Bond ETF (NYSEArca: EAGG). EAGG seeks to track the investment results of the Bloomberg Barclays MSCI US Aggregate ESG Focus Index, which has been developed by Bloomberg Barclays Capital Inc. with environmental, social and governance (“ESG”) rating inputs from MSCI ESG Research LLC pursuant to an agreement between MSCI ESG Research and Bloomberg Index Services Limited or an affiliate.

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