The growing importance and inclusion of sustainability values among global investment themes has redefined investors’ views of sustainability factors in portfolio strategies. The idea that sustainability concepts are futuristic is dated—the future has definitely arrived.
The world is changing, and the percentage of retail and institutional investors applying environmental, social, and governance (ESG) principles is on the rise. More and more sustainability data providers are scaling their business to provide deeper qualitative and extensive information, as companies are prioritizing disclosure and reporting. Sustainable funds attracted USD 185.3 billion in net flows in the first quarter of 2021, which was up 17% from the previous quarter at USD 158.3 billion.1 While Europe led the ESG scoreboard followed by the U.S., Asia ex-Japan reported USD 7.8 billion, with 4% of total inflows and 237 funds. Many projections forecast a multifold growth in ESG solutions in investment products, so it might be time to take notice of this new wave.
India is slowly waking up to the growing reality of ESG relevance. While some have embraced this concept, skepticism rules in a market that has the leading country benchmark, the S&P BSE SENSEX, above 52,000 and a one-year annual return of 62%.2 The thought that ESG is just a novelty is still at large. Therefore, a deep dive into this fast-developing concept may be a worthwhile dialogue.
First, what are ESG values and what constitutes them? ESG investing is not about categorizing companies on the basis of how “good” they are but how they manage each of the ESG factors (environmental, social, and corporate governance), thereby helping investment strategies in their selection methodologies. S&P Dow Jones Indices has a wide gamut of indices tracking these factors. ESG indices based on core benchmarks, such as the S&P 500® ESG Index, S&P Europe 350® ESG Index, S&P 500 ESG Elite Index, and S&P BSE 100 ESG Index are just a few.
Exhibit 1 shows that return trends by ESG indices in U.S., Europe, and India tended to be higher than the underlying benchmark. Though nominal outperformance, it does contest many myths that ESG factors lead to underperformance. For the U.S. market, we compared the S&P 500 ESG Elite Index and S&P 500 ESG Index, both of which showed outperformance in the majority of periods, other than a slight underperformance by the S&P 500 ESG Index in the one-year period. The Indian benchmark outperformed the other benchmarks, but the ESG index still outperformed in all periods and by a greater margin than in the U.S. or Europe.
Though these statistics are not a forecast of future performance, it does provide a compelling review of such sustainability factors in investment strategies.
2 Yearly annualized returns as of May 31, 2021The posts on this blog are opinions, not advice. Please read our Disclaimers.