In part one of this series, we discussed the rapid evolution of ESG investing over the last few decades and the important, yet somewhat convoluted, task of measuring what matters. In this second part, we’ll debunk some myths and misconceptions around ESG investments.
Key Takeaways
- Many commonly held misconceptions about ESG are just that. For instance, rather than sapping performance, ESG strategies have generally been more resilient to economic downturns and thus supportive of stronger risk-adjusted returns. Given governments’ focus on environmental regulation and consumers’ desire to shop sustainably, this pattern of outperformance should persist.
- Similarly, ESG strategies do not cost more than average. Instead, most ESG funds’ expense ratios are equal to or lower than their peers.
Sustainability without Sacrifices
Despite an ever-smaller contingent of naysayers, the body of evidence shows that ESG considerations at both the security and fund levels are not a hindrance to performance. Instead, they are more likely to be harbingers of superior long-term risk-adjusted returns. One example is the paper by Hang, et al., which aggregated the findings of 142 separate studies and found a positive link between companies’ efforts to become more environmentally conscious and their financial outperformance in subsequent years. Moreover, as seen through the 2008 financial crisis and the unprecedented turbulence of 2020, ESG funds can provide downside protection during periods of economic upheaval and are generally less volatile than strategies that don’t consider sustainability according to a Morgan Stanley analysis of more than 3,000 retail funds.
Our own analysis confirms this as well. We looked at the performance of a static 60/40 ESG benchmark against Morningstar 50%-70% VA & VUL Allocation funds. Even though these funds could, and generally did, adjust their strategic and intra-asset allocations to take advantage of the market environment, they nonetheless trailed the benchmark during all three periods.
