Nine of the 10 largest US mutual and exchange traded ESG funds outperformed the benchmark Vanguard S&P 500 ETF index (VOO), in the first half of 2020, according to a study published this week by the Washington-based World Resources Institute.The funds, all of which focuson large-cap US stocks, beat the VOO by an average 2.1%.
Environmental, Social and Corporate Governance, or ESG refers to the three central factors measuring the sustainability and the societal impact of an investment in a company or business.
With the rise of the ‘responsible investment’ movement, ESG is increasingly regarded to be part of a shareholder’s duty, and is challenging the age-old belief that institutional investors’ only objective was to maximise short term returns for shareholders.
The pandemic has caused investors worldwide to reassess their positions and pay greater attention to how they allocate their resources and the role company operations play in influencing society. According to Deloitte professional investors could have 50% of their total portfolios in ESG assets in the next five years.
An ESG investment is one that contributes to an environmental objective, has positive social impact and follows good governance practices. Weapons and landmine manufacturers are the most widely excluded. Tobacco comes next. But then come fossil fuels, ahead of gambling and alcohol stocks. Twice as many institutions exclude fossil-fuel companies as nuclear power. That is a huge change over the last generation, and indicates the scope of the challenge ahead for traditional energy groups.
In Europe, the idea that ESG principles should form a part of investment decisions is widely accepted, and growing demand for renewable energy, social housing and, of course, healthcare featured strongly in the most recent quarterly reshuffle of the London Stock Exchange’s mid-cap rankings.
The US, however, has been slower to adopt – until now. The largest ESG fund in the world by assets, according to Refinitiv data from September, is the MFS Value Fund. It had 2.45% of its total portfolio allocated to oil exploration firms in July of this year. Ten years before that, 11.66% of its total fund was invested in these oil firms.
With BP, Exxon and other traditional energy groups currently trading at rock bottom prices the rise of the ESG movement does not bode well for them, unless they can shift operations toward a more sustainable future.
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