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Executive Summary
ESG funds are much lower in number of funds and in value of net assets.
ESG ETFs have both lower ratio in net expense and gross expense, potentially proving that ESG funds are more profitable than Regular funds.
ESG ETFs have boomed in the past decade, peaked in 2020, and now took a downturn. Regular fund seemed to stay consistent since 1995.
Introduction
ESG investing is a form of sustainable investing that considers environmental, social, and governance (ESG) factors to judge an investment’s financial returns and its overall impact. Essentially, ESG score of an investment measures the sustainability of an investment in those specific categories, and have recently gained increasing popularity and traction. According to the 2022 Sustainable Investing Overview by the US SIF Foundation, there are USD 8.4 trillion in sustainable investing assets, while survey by RBC Global Asset Management in 2020 found that 75 percent of the responds have integrated ESG into their investment approach. ESG ETF in turn takes the ESG investment strategy with ETF investment strategy, allowing investors to invest in a basket of stocks, bonds, and other assets, offering a flexible, low-cost way to build a highly diversified investment portfolio. Some benefits of investing in ESG ETFs include easily incorporating responsible investment in an investor’s portfolio; deliver portfolio resilience since sustainable investment can have the potential to uncover hidden risk; support diversification; and be a cost-effective way to invest.
Body Paragraph
ESG funds are much lower in number of funds and in value of net assets. Figure 1 depicts the difference in net assets by fund, color coded by region. ESG funds tended to be either global or based in North America. There are more number of funds in regular funds, and higher value in net assets with an outlier of a fund worth USD 300 billion. Figure 2 compares number of funds based on sustainability ratings, color coded by types of fund. What is notable about Figure 2 is that Regular Funds that might not be labeled as ESG funds has a good chance of having just as high of a sustainability rating that a ESG fund does.
ESG ETFs have both lower ratio in net expense and gross expense. When referring to Figure 3 and Figure 4, both net and gross expsense ESG funds are lower in ratio value in not only median value, but also maximum, minimum, 25th percentile and 75th percentile value than the regular fund values. Therefore, we can deduct ESG funds may be more profitable than regular funds. However, ESG ETFs are newer and smaller and the data set available may be skewed more favorably towards ESG ETFs. Actual studies of returns showed mixed results as well. While a study in 2020 by Morgan Stanley found that sustainable equity funds outperformed regular funds by 4.3 percentage points, Reuters reported in January 2022 that ESG funds fell 9.2 percent against a 5.3 percent drop in the SPX, mainly driven by tech sector declines.
ESG ETFs have boomed in the past decade, peaked in 2020, and the new ESG funds being created is slowing down. Regular fund seemed to stay consistent since 1995. Demonstrated by Figure 5, since 2020, the ESG ETFs have peaked and the number of new ESG funds being added have slowed down. There are multiple factors to this downturn: the COVID-19 pandemic and the market crash that followed; recession fears; inflation; and the Russia-Ukraine crisis. Due to these uncertainties, equity investors have turned back to value stocks and away from growth stocks, and shorter-dated bonds outperformed in fixed incomes. Since sustainable funds tend to be geared towards long-term funds, ESG funds’ popularity dwindled to a certain extend.
Conclusion
In conclusion, there needs to be more data and analysis on ESG funds to truly tell if they are more sustainable and less risky than Regular funds. While ESG funds may be more profitable in the context of expense ratio, ESG funds are more susceptible to investor’s confidence. After economic downturn post-COVID, ESG fund popularity dropped greatly and investors turned back to short-term investment funds. All in all, ESG funds are still a great way to diversify an investor’s portfolio and help deliver portfolio resilience by hedging against risk such as climate risk.