Around the world, Environmental, Social and Governance (ESG) investing has seen rapid growth over recent years. In the US, however, demand from institutional investors for ESG or climate-integrated investment strategies has lagged that of its European and Asian counterparts – but it is growing quickly. US ESG fund flows reached $10.4 billion for in the second quarter of 2020, which on a year-to-date basis nearly matched the full-year 2019 sustainable fund net flows of $21.4 billion.1
The US Department of Labor’s recently proposed rule, entitled Financial Factors in Selecting Plan Investments, sought to clarify obligations related to the consideration of ESG factors by fiduciaries responsible for retirement plans. As investors continue to evaluate these obligations, this article provides a framework for assessing ESG performance as it tracks the returns of four prominent US ESG index strategies versus the benchmark – using the extreme market volatility caused by the COVID-19 pandemic as a unique test of the strategies’ performance.
Performance of Four Equity ESG Indices
ESG can play a key role in identifying potential business and financial risks, which in turn, can impact a company’s share price. There is also strong empirical evidence that ESG considerations have contributed to long-term sustainable returns.2
Over the first half of 2020, ESG integrated index strategies have been a source of added value vis-à-vis the broad market, as measured by the S&P 500 Index. We determined this by analyzing the performance of four US equity ESG indices, created by four different index providers (in order to remove any construction bias). As summarized in Figure 1, the four ESG index strategies provided consistent outperformance relative to the market cap index, year-to-date, for 1 year, 3 years, 5 years and since inception of the Bloomberg SASB US Large Cap Select index (in March 2014).3