Funds with “above average” or “high” sustainability ratings outperformed comparable funds with lower ratings in sustainability, according to Barron’s fourth annual ranking of ESG investing. Of the 189 funds that met the ESG criteria in 2019, 41% outperformed the S&P 500 index for the year. That’s compared to just 29% of big-cap equity funds overall that beat the index, Barron’s reported.
In terms of overall return, the funds that met the ESG criteria had a return of 30%, a hair below the 31.5% returned by the S&P 500 index for the year.
The high performance of certain ESG funds appears to be “more than happenstance,” according to Morningstar, the creator of the sustainability ratings. Companies that manage their financials well are often those that are making similar intensive efforts to manage ESG responsibly, the organization says.
The spotlight on top-performing ESG funds comes at a time when interest in sustainable investing is at a high. A report published last summer from Ethical Markets showed an upward trend in private “green” investments worldwide, and claimed these investments equal a cumulative $10.387 trillion as of 2019. “Although we still have a long way to go,” wrote Tim Nash, one of the report’s authors, in Corporate Knights, “…the green economy is already here and now, to the tune of $10 trillion over the last decade.” In fact, the percentage of individual US investors that are interested in sustainable investing has gone up by 10 percentage points — to 85% — since 2017, and more specialty funds are expected to be launched, according to a recent Morgan Stanley survey.
However, warns Barron’s, not all funds that have a stated ESG goal are built the same. Of the 153 actively managed US stock funds that have such a stated goal, 68 did not make Barron’s list of the most sustainable funds because their sustainability rating from Morningstar was not high enough, Barron’s says.
Additionally, Barron’s warns, the benchmarks that managers use to apply ESG isn’t standardized, and the rules and practices concerning disclosure are still evolving.
