There’s no doubt that ESG investing has been gaining popularity in recent years. A 2018 study by Morgan Stanley found that 72% of global investors consider ESG factors when making investment decisions.
Environmental, social, and governance (ESG) investing is a form of investing that allows socially conscious investors to screen for suitable investments by returns and impact on social issues.
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But, are ESG investments really more profitable? Is it just some “woke capitalism” movement that doesn’t actually pay off? Or worse, are you losing out on financial returns in an exchange of taking a stand for sustainability?
That’s a question that you should be asking if you’re thinking of employing ESG investing. And with good reason.
Let’s find out.
Profitability: ESG investing vs Traditional investing
Morgan Stanley’s Sustainable Reality report which studied the performance of 11,000 mutual funds between 2004 to 2018 revealed two key findings:
- returns of sustainable funds were in line with comparable traditional funds
- sustainable funds may offer lower market risks
But we all know how the story unfolds – the pandemic and subsequent inflation woes are now disrupting many investors’ financial plans.
Hence, you may be wondering:
Can ESG investments continue to do well in the current markets?
Let’s compare the performances of some ESG indices against their counterparts (year-to-date, as of 17 Oct 2022) to glean some insights:
S&P 500 vs S&P 500 ESG Index
Year to date, the S&P500 index (blue) is down 25.3% while the S&P 500 ESG index (orange) is down 24.9%.
NASDAQ 100 vs NASDAQ 100 ESG Index
Year to date, the Nasdaq 100 (blue) is down 35% while the Nasdaq 100 ESG index (orange) is down 35.3%.
As you can see, their relative performances suggest a similar trend as reported in the 2018 Morgan Stanley report: returns of sustainable funds are in line with comparable traditional funds.
Are ESG investments more profitable?
In a nutshell, no.
However, the good news is that ESG investments perform in line with comparable funds which means if you choose to invest only in companies that advocate ESG values, you’ll not be giving up much investment performance.
If you’re looking to gain some exposure, here’re the best ESG ETFs and the top 10 MSCI AAA rated ESG ETFs which could give you some headway to start your research from.
