ESG funds combine purpose and performance
Many investors believe there’s a trade-off. You can either invest sustainably or make money. In fact, you can do both. ESG investing has proven to be more than a good idea: it’s a profitable one.
ESG: capital letters, capital idea
What exactly is ESG investing? ESG stands for Environmental, Social and Governance. Taken together, ESG standards help stock-pickers size up a company before investing in it. Is the company a good steward of nature? How does it treat its employees, customers, and the communities where it operates? Does it have strong and transparent leadership?
That last part—leadership—plays an outsized role in how well a stock performs. When a company meets the standards of Governance (G), the other letters often fall into place. Leaders from a fifth of the world’s top companies have committed to net zero carbon emissions, for example.1 And it’s no longer good business to stand quietly by during periods of social upheaval. In the summer of 2020, companies as diverse as Sephora, Ubisoft, and pharmaceutical giant, Merck, publicly supported the Black Lives Matter movement, and backed that support up by introducing anti-racist corporate policies.
Today, ESG investors demand that leaders and companies take a stand.
But do ESG funds deliver?
Morgan Stanley compared the performance of nearly 11,000 mutual funds between 2004 and 2018—including funds with an ESG focus. The verdict?
“There is no financial trade-off in the returns of sustainable funds compared to traditional funds.”
What’s more, during periods of extreme volatility, the same study found “strong statistical evidence that sustainable funds are more stable.”2
The bigger surprise is that this is nothing new. Responsible investing has been around for nearly a century, even if its definition has changed over the years.
94 years ago, Boston’s Philip Carret launched what’s become the Pioneer Fund, a fund notable, at first, for what it didn’t invest in (including gambling, liquor and tobacco). Today’s Pioneer Fund applies contemporary ESG screens to its investments and has earned average annual returns of 12% since 1928, besting the S&P 500.3
The future is ESG
To Andrea Tang, CFA, Manager of Lawyers Financial’s wealth program, it’s no surprise that ESG-focused investment portfolios are delivering great results.
“The companies that do a good job of managing their environmental footprint and promoting the welfare of society also tend to be well governed. These three ideas are often connected. So, it’s not surprising that most of these firms have put themselves in a position to keep generating long-term results for investors.”
Recent Morningstar4 research confirms Tang’s optimism.
- 75 per cent of ESG-screened indexes outperformed their broad-market equivalents in 2020.
- 88 per cent outperformed in the five years leading up to 2020.
- 91 per cent lost less than broad-based equivalents in the same period.
Tang looks forward to a time when we won’t need to distinguish between ESG investing and conventional practice. “The connection between investments that take these non-financial risk factors into consideration and investment performance is so clear, it’s hard to imagine anyone choosing to ignore it,” she says. “Hopefully, this will simply become the new norm.”
Add ESG to your financial plan
Karen Sill, Manager of Financial Planning at Lawyers Financial, sees ESG funds as ideal building blocks for any financial plan. “The basics of financial planning haven’t changed. It still comes down to setting realistic goals and staying committed. ESG simply provides a way to achieve your objectives while showing your commitment towards a better, more sustainable future.”
We can help
Lawyers Financial sponsors investments that range from discretionary wealth to DIY, and each platform offers solutions with built-in ESG. Talk to your Lawyers Financial advisor about building an investment portfolio that reflects your values and delivers results.
Sources: 1. Forbes: “A Fifth of World’s Largest Companies Committed To Net Zero Target,” March 24, 2021. 2. Morgan Stanley Institute for Sustainable Investing, “Sustainable Reality: Analyzing Risks and Returns of Sustainable Funds,” 2019. 3. Amundi Asset Management: Pioneer Fund performance, as of December 31, 2021. 4. Morningstar: “Morningstar’s ESG Indexes Have Outperformed and Protected on the Downside,” February 8, 2021.