In recent years, incorporating environmental, social and governance (esg) factors into investment decisions has become an increasingly popular trend. However, some investors argue that a focus on esg could hurt investment returns. This has sparked an intense debate around the performance of anti-esg investment funds that avoid companies with high ESG scores.
Many active fund managers underperform benchmark indexes
According to the S&P Indices Versus Active (SPIVA) scorecard, a majority of actively managed US equity and bond funds have failed to beat their benchmark indexes over 1, 3, 5 and 10 year horizons. This suggests that many traditional fund managers already struggle to generate market-beating returns even before considering ESG factors. As such, further constraints related to ESG could make outperformance even harder.
Some studies show incorporating ESG has little impact on returns
A 2022 analysis published in The Journal of Investing analyzed the performance of over 200 sustainable mutual funds and ETFs. It found no statistically significant difference in returns between these sustainable funds and conventional funds over 1, 3, 5 year periods. This suggests ESG funds can generate comparable returns to traditional funds.
Investor demand for ESG funds continues to accelerate
Despite debates around performance impact, investor demand for sustainable funds has skyrocketed in recent years. According to Morningstar data, flows into US sustainable funds hit a record $135 billion in 2021 – more than double the 2020 figure. This growth is being driven by both institutional and retail investors increasingly considering ESG factors.
Weighing ethical aims against return objectives
Ultimately, the choice between ESG and anti-ESG funds involves weighing ethical aims against return objectives. Investors with a strong social conscience may choose sustainable funds even if they lag benchmark performance. But those focused strictly on maximizing profits could see ESG considerations as an unnecessary constraint hurting returns.
In conclusion, the debate around whether a focus on ESG hurts investment performance remains unsettled. Some data suggests incorporating ESG has little impact on returns, but active funds already struggle to beat indexes. Ultimately, investors need to weigh their social aims against return targets.