Environmental, Social, and Governance (ESG) funds are rapidly gaining in popularity among investors. During the first half of the year, U.S. funds that focus on ESG factors when making investment decisions pulled in a net total of $8.4 billion compared to the $5.4 billion collected for all of 2018. ESG is among one of the fastest growing investment strategies, according to Bank of America.
“While the total AUM of ESG funds is still nascent, ESG has been one of the fastest growing strategies in recent years,” wrote analysts at the bank in a recent research note. “Among smart beta strategies, ESG AUM has grown at the fastest rate at 70%+ CAGR over the past five years.”
What It Means for Investors
Among the most overweight stocks in ESG funds are Hanesbrands Inc. (HBI), Gap Inc. (GPS), Perrigo Co. Plc (PRGO), Alliance Data System (ADS), Hologic Inc. (HOLX), Pentair Plc (PNR), IPG Photonics Corporation (IPGP), Xylem Inc. (XYL), Cummins Inc. (CMI), and Teleflex Inc. (TFX). The most overweight sectors in ESG funds include tech and materials, while the most underweight include energy, utilities and communication services, according to Bank of America.
Investors looking to improve the ESG content of their portfolios might also consider some of the leading ESG funds identified by investment management firm Charles Schwab, including Calvert Balanced A (CSIFX), iShares ESG MSCI EM ETF (ESGE), SPDR MSCI EAFE Fossil Fuel Free ETF (EFAX), JPMorgan Emerging Markets Equity A (JFAMX), and RBC Emerging Markets Equity A (REEAX).
As investors become more socially and environmentally conscious and ESG funds rise in popularity, it’s worth considering some critical perspectives. Some argue that ESG funds deliver inferior financial returns. But such critics should be reminded that financial returns aren’t everything. Some investors gain personal satisfaction in knowing that their money is going to supporting companies that share their values. That itself is a positive return, even if it’s not a financial one.
On the other hand, ESG advocates would argue that socially responsible and environmentally sustainable companies will outlast companies that aren’t. Companies that shirk social and environmental responsibilities are taking risks that they will eventually pay for, as will those who invest in them. Think of Volkswagen’s emissions scandal. In the long run, it’s possible it will be the sustainability-conscious investor that will reap the greater financial benefits.