Alexander Zhang
In the past few years, we experienced a devastating pandemic, which severely disrupted the global economy. In the U.S., for example, the S&P 500 dropped ~30% in what is now referred to as the “COVID crash”, occurring mostly during the month of March 2020. ESG ETFs were not immune to the crash, with the iShares ESG Aware MSCI USA ETF (NASDAQ: ESGU) and the Vanguard ESG US Stock ETF (BATS: ESGV) both falling roughly 31%. Of course, the main intended purpose of ESG investing as a strategy is to be “future proof, meaning that it will be able to withstand any future changes in the economy or in the world as a whole.
Adding on to this point, certain businesses are also beginning to incorporate ESG aspects into their business model and marketing materials, especially those dealing with the “environmental” factors. Companies love advertising that their product is “less harmful to the environment” or creates “less waste”, in addition to any other characteristics of their business that may contribute positively to the environment.
Although this shift may spark renewed and/or increased interest in the ESG investing space, we have not yet seen any significant movements or gains in the ESG funds. Both ESGU and ESGV are underperforming the S&P 500 on the 1Y timescale. When we get to the 5Y timeline, we notice a drastic difference in performance between the two ESG ETFs, and their upside/downside relative to the market. In the past five years, ESGU has outperformed the S&P 500 index, up ~65% in relation to the S&P’s ~63% at the time of writing. Unfortunately, ESGV has underperformed significantly, up only ~42% in the past five years. This may be another indicator of the heightened volatility that we have seen recently in the past few months, due to inflationary pressures, interest rate hikes, and overall uncertainty among investors in the market.
Nevertheless, ESG investing remains a prominent strategy for many investors and institutions. The combination of high inflows but also high outflows indicates continued interest in ESG–it appears that sustainable funds are relatively more resilient compared to the market in terms of inflows/outflows due to the nature of most ESG investors (Horton); at its core, ESG investing is all about the long-term, the vision that the most environmentally and socially responsible companies will be the most long-lasting and prominent. This has been demonstrated especially in the field of clean/green energy ETFs such as QCLN and ICLN, which have both strongly outperformed the index across all timescales. The combination of accelerating climate change risks in addition to the vast prospects for future growth makes clean energy and environmental investing an exciting pursuit, which may provide outsized returns in comparison to traditional ESG investing.
One last reason why ESG investing may be left behind in favor of just the “E” is because of the general lack of knowledge of the “SG” in the acronym. Many know that they stand for “social” and “governance”, but those factors are much more difficult to consider than those related to “environmental” concerns.
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