For years, sustainable investing was viewed with suspicion. Could portfolios that avoided oil and gas companies, tobacco, and other profitable but controversial industries have high enough returns to satisfy investors? Would they survive during times of market upheaval?
The COVID-19-fueled financial crisis is proving the naysayers wrong. Sustainable funds — dubbed Environmental, Social, and Governance (ESG) funds in industry parlance because they screen investments for various ethical and social standards as well as transparent governance practices — have been outperforming conventional funds this month. With a crash in oil and stock prices battering the value of financial assets across the board, ESG funds appear to be weathering the storm better than the traditional funds that might previously have been considered safer bets for investors.
According to a Bloomberg analysis, the average ESG fund fell by about 12 percent this year. That’s a big tumble, but it’s just half the decrease seen by the S&P 500 Index over the same period. A separate analysis of about 200 U.S. funds by Morningstar, a financial services firm, also found that, although ESG funds have taken a hit, they’re faring better than their conventional counterparts and are overrepresented in the top quartiles of their peer groups, in terms of their performance.
“If you combine ESG with [financial] expertise, you often have outperformance,” said Cary Krosinsky, a professor at Yale University and an expert on sustainable finance. “That’s unquestioned.”
Surveys indicate that millennials are interested in using their money to do good. As they’ve inherited wealth, sustainable investment funds have moved into the mainstream. $30 trillion of the world’s assets are now in ESG funds. Just last year, money moved into sustainable funds quadrupled to $20.6 billion compared to 2018. That rapid growth occurred during a bull market when the economy was booming and stocks were soaring across the board. Most ESG funds are now facing a bear market for the first time: As investors panic, stock prices drop precipitously, and there seems to be no clear end in sight to the pandemic.
For now, ESG funds are mostly gaining popularity among institutional money managers and the wealthy. According to a recent survey, just 2.9 percent of 401(k) plans have one sustainable fund. But as interest in ESG funds grows, middle-class investors are also beginning to incorporate ESG funds into their retirement plans.