Weekly Commentary December 20, 2019
A Look Into ESG Funds
By Tim Courtney, Chief Investment Officer
Over the last decade, environmental, social and governance (ESG)1 funds have become increasingly popular as more and more investors look to align their money with their personal values. Investors can now screen and select companies based on multiple factors.
There are endless ways to construct ESG portfolios and the number of funds available in the ESG space has continued to proliferate over the last 10 to 15 years. Additionally, the assets that qualify for inclusion in these strategies are increasing, with one report showing that sustainable investment assets have grown 34 percent since 2016.2
One interesting development with ESG funds is that the performance of these funds seems to have been strong over the last several years, which is why we decided to take a closer look at the space and recent returns.
Back in 2016, we conducted a major analysis on these funds and the returns weren’t inspiring. The vast majority had underperformed the broad markets, in many cases by a meaningful amount over 5- and 10-year periods. The fund set we reviewed was relatively small however, since many ESG strategies had only recently started and didn’t have a decade’s worth of performance available.
We finished the study with a limited number of ESG funds that met our criteria and that we would recommend to clients interested in the space. Since then, however, there are more years of data to review and many more strategies available now that ESG assets have nearly tripled over the last decade.3 In addition, performance reviews of the space indicate that many of the strategies’ returns have begun to match or even outperform the market.
In reviewing ESG funds, there are some interesting reasons why we believe recent performance has improved significantly from previous numbers. First, many of the funds have greatly reduced or have no exposure to the energy sector, which has been an underperformer over the last several years.4 Second, many have higher-than-average exposures to the technology sector, which tends to have relatively “clean” business practices and avoids issues with pollution, fair trade, human rights, etc. Tech companies also happen to be wrapping up a fantastic five-year stretch.5
Our takeaway from the study is that the ESG performance over the last few years is at least somewhat due to the sector allocations of the funds. An issue of risk here is that tech companies may be subject to higher regulation and greater scrutiny moving forward.
ESG funds are valid investment strategies that often are well-defined, have good diversification and reasonable costs. However, the recent performance may have more to do with how the tech sector has performed rather than the fund’s strategy mandates. If you have any questions or are interested in ESG, call your Exencial advisor and we’ll be happy to go over our recommendations.
1. Investopedia – Environmental, social, and governance (ESG) criteria
2. Global Sustainable Investment Alliance – 2018 global sustainable investment review
3. CNBC.com – ‘Sustainable’ investors match the performance of regular investors, new IMF research finds
4. MarketWatch – S&P 500 energy sector index
5. CNN Business – Market sectors – Information technology
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.