We often hear the same question asked in a variety of ways: “Will sustainable investing strategies help my portfolio?” “What kind of performance can I expect if I incorporate ESG information into my investment strategy?” or simply “Does adding ESG information into my investment strategy work?”
They all ask the same thing: Is this a good idea?
As with so many other things, there are a range of approaches to take.
Approaches to sustainable investing can vary widely – different investors and investment managers have diverse objectives and we can’t oversimplify sustainable investing to mean one thing.
Evidence has been building for years that using ESG information in the investment process, at a minimum, does not hurt performance over the long term. The consensus from the meta studies that have been done on this is that using an “ESG lens” can strengthen investment performance when it’s done by a skilled manager.1
On the whole, there may be times when the common elements in many ESG focused funds help them outperform as a group. In other situations, they may underperform. In 2022, ESG focused strategies on the whole underperformed primarily due to a lack of exposure to the energy sector, and in some cases, a tendency to have higher growth-oriented exposure. If we want to look at another short-term time period for the performance of ESG focused strategies, let’s look at 2020, as well. We conducted a review of ESG mutual funds and ETFs available on the Envestnet platform and found that these ESG strategies outperformed their non-ESG peers, across U.S. equity, international equity and fixed income, over both a four-month and 12-month period. Performance trends when it comes to ESG strategies is heavily dependent on the view you’re choosing to look at.
Our take on sustainable investing and performance
Recently, I was fortunate to sit down with our very own Dana D’Auria, Co-Chief Investment Officer and Group President of Envestnet Solutions, to share perspectives on these important questions. Our conversation turned into a 9-minute crash course in how you might want to discuss sustainable investing performance with your clients.
The bottom line
ESG is just more information and its integration lends itself to long term investment objectives – providing a lens on long term trends and issues like automation, climate change, resource constraints, demographic changes, and consumer and labor force expectations. At the end of the day, it will always come down to evaluating the skill of the manager, what approach they’re taking, and what their objectives are. Cherry picking certain universes, years, or market cycles is way too narrow a way to look at it.