It’s a year most of us are now happy to see in the rearview mirror, but 2020 was kind to one subset of the financial sector: ESG funds. “Think of ESG investing as a recovery strategy and the future of the global economy comes into sharper focus,” TriplePundit’s Tina Casey observed in April.
Investors have heeded that call.
At a macro level, funds screened for environmental, social and governance (ESG) factors proved to be more resilient than conventional fund counterparts, according to a report released last week by Morgan Stanley. The financial giant’s Institute for Sustainable Investing crunched the numbers and found that total returns for U.S. sustainable and ESG equity funds outpaced traditional funds by 4.3 percent in 2020.
ESG bonds also held their own, providing returns 0.9 percent higher than the traditional bond funds available on the market last year.
“The difficult events of 2020 underscored the importance of sustainability concerns and strengthened the rationale for sustainable investing,” said Audrey Choi, Morgan Stanley’s chief sustainability officer and CEO of the Institute for Sustainable Investing, in a public statement. “Sustainable funds’ strong risk and return performance during an exceptionally turbulent year further erodes the persistent misconception that sustainable investing requires a performance sacrifice.”
The company’s research follows up on a previous report that showed ESG funds outpacing traditional funds during the first six months of 2020. Over the years, Morgan Stanley’s analysts said that both ESG and conventional funds performed at a similar pace, but for investors who are queasy at the thought of market volatility, ESG funds generally were far more stable and offered more downside protection.
Other financial companies have made similar observations. In fact, sustainable and ESG funds scored record inflows during the first few months of the pandemic amid turmoil in global equity markets, a recent Morningstar report concludes, and for the most part maintained that performance as 2020 dragged on.
U.S. investors in turn have been buying into these funds’ performance. A Morgan Stanley report from last year found that approximately half of the country’s individual investors have turned to sustainable investing. Meanwhile, at least 80 percent of asset-owner financial institutions say they are integrating ESG considerations within their investment processes.
There’s no reason to think this trend will not continue through 2021.
“The U.S. sustainable investing market ended the year on a high note, with record-breaking net inflows in October, November and December,” added Matthew Slovik, managing director and head of global sustainable finance at Morgan Stanley. “Amid this continued growth, analyzing the performance of sustainable investments, and proving their resiliency, is critical to advance the field and to encourage others to invest with an ESG mindset.”
Meanwhile across the pond, ESG funds had a banner year in Europe, too, the Financial Times recently reported.
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Leon Kaye has written for 3p since 2010 and become executive editor in 2018. His previous work includes writing for the Guardian as well as other online and print publications. In addition, he's worked in sales executive roles within technology and financial research companies, as well as for a public relations firm, for which he consulted with one of the globe’s leading sustainability initiatives. Currently living in Central California, he’s traveled to 70-plus countries and has lived and worked in South Korea, the United Arab Emirates and Uruguay.
Leon’s an alum of Fresno State, the University of Maryland, Baltimore County and the University of Southern California's Marshall Business School. He enjoys traveling abroad as well as exploring California’s Central Coast and the Sierra Nevadas.