Socially responsible exchange traded funds that track environmental, social and governance principles are turning heads this year as more investors begin to incorporate these strategies into a core portfolio.
According to Morningstar Direct data, over the first four months of 2020, investors funneled a record $12.2 billion into funds that invest in environmental, social, and governance practices, the Wall Street Journal reports. The new inflows were more than double the amount ESG funds attracted for the same period last year.
Among the most popular ESG-related ETF plays so far this year, the iShares MSCI USA ESG Optimized ETF (ESGU) attracted $5.4 billion in net inflows, iShares MSCI EAFE ESG Select ETF (ESGD ) brought in $2.5 billion and iShares MSCI EM ESG Select ETF (ESGE ) saw $850 million in inflows, according to XTF data.
The group has also captured better-than-average returns or at least done less poorly than the broader S&P 500. Over 70% of ESG funds across all asset classes outperformed their counterparts during the first four months of the year, according to Morningstar Direct. For example, ESGU fell 9.1% year-to-date while the S&P 500 Index declined 10.5%
“This crisis has shown that ESG investing is here to stay—ESG is not a fad,” George Serafeim, a Harvard Business School professor who has studied sustainable investing, told the WSJ. “People are looking for resilience. They are looking for companies that are able to weather the short-term storm and are positioning the business for long-term success.”
Serafeim and researchers from State Street Associates found companies that protected their labor forces and supply chains during the recent drawdown experienced greater net inflows from institutional investors and better returns compared to industry peers.
“For companies that are doing the right thing now, it’s going to pay off,” Jon Hale, Morningstar’s director of sustainability investing research, told the WSJ. “How they treat their workers, how they serve their customers and clients in a difficult environment, and how they manage their supply chain…these issues will become more top of mind for investors.”
The ESG category has been bolstered by its heavier tilt toward technology stocks, which have outperformed this year. Technology companies tend to score highly on ESG rating scales due to their positive treatment of employees and lower carbon emissions, among others. For instance, Microsoft has a “AAA” rating from MSCI – the highest score – for its strong corporate governance, data security, and human capital development.