It's important for investors to have an understanding of how well (or not), their investments are performing.
In this post, I'm going to summarize the performance of ESG funds in our portfolio model.
REAL QUICK, WHAT IS ESG AGAIN?
ESG is an acronym for Environment, Social, and Governance. ESG investing incorporates an additional layer of analysis in the stock selection process. Specifically, it evaluates the impact of corporate behavior on people and the planet, quantifying net positives against net negatives.
For example, a coal-fired power plant serves society in a very meaningful way. Power for homes and industry is a necessity in modern life. Power is good! At the same time, extracting and burning fossil fuels pollutes the environment & contributes to climate change. Bad!
So is a coal-fired power good or bad? Tough question...
The point of ESG investing is to make evidence-based decisions using data beyond that of conventional investing analysis.
It's important to note that ESG investing is investing. It is not activism or anything "woke". The screening process central to ESG investing doesn't care about politics or cultural fads. It's based purely on data.
Boiled down to its core, ESG investing is fundamentally concerned with risk. Simple as that.
ESG FUND PERFORMANCE
Below are the ESG-specific target holdings in our portfolio models. I left out the two non-ESG bond funds (government bond funds) we use since I'm only concerned with ESG metrics for this post. For the record, both funds I left out outperformed their benchmarks across all time periods.
Performance is reported in "trailing" time frames against a benchmark. In this summary, I'm focused on recent performance through the market decline of 2022 and the rebound since mid-October.
All data is taken from Morningstar and is current as of 2/23/23.
Calvert International Responsible Index Fund (Ticker: CDHIX)
Xtrackers MSCI EMs ESG Leaders ETF (Ticker: EMSG)
Etho Climate Leadership ETF (Ticker: ETHO)
Humankind US Stock ETF (Ticker: HKND)
Nuveen ESG Large Cap Growth ETF (Ticker: NULG)
Nuveen ESG Small Cap ETF (Ticker: NUSC)
Impact Shares Sustainable Development Global ETF (Ticker: SDGA)
Green Century MSCI International Index Fund (Ticker: GCIFX)
VanEck Green Bond ETF (Ticker: GRNB)
Nuveen ESG US Aggregate Bond ETF (Ticker: NUBD)
iShares ESG 1-5 Year Corporate Bond ETF (Ticker: SUSB)
Vanguard ESG Corporate Bond ETF (Ticker: VCEB)
ESG funds outperformed their benchmarks 79% of the time.
ESG funds underperformed their benchmarks 21% of the time.
Average outperformance = 1.16%.
Average underperformance = -1.10%.
Best outperforming fund = 7.29% better than the benchmark.
Worst underperforming fund = -3.29% behind the benchmark.
CONTEXT & CONCLUSIONS
Clients of the firm are doing better on average than the benchmark in the short term. This helps support the evidence that ESG investing has historically outpaced the benchmark over long periods of time as well.
The outperformance clients of the firm have experienced isn't huge, so don't get overexcited. However, it's measurable and it's present.
I'd also like to point out that I'm not doing anything fancy managing client portfolios. My strategy is to use INDEX FUNDS and rebalance only when necessary. The outperformance of your portfolio returns is not a function of me being good at picking winners. By design, index funds are built to purposely track a specific part of the market.
In the vast majority of cases, we should expect the funds I've selected in client portfolios to earn what the market delivers.
I don't expect any particular fund to deviate more than a percent, on average, from their benchmarks. I've been saying this for years based on observation and it still holds true today.
Despite my firm's models being underweight energy and overweight tech (natural byproduct of ESG funds), we would expect my portfolio models to underperform over the last year. This is because energy was up 62.4% last year and tech was down -27.7% in 2022.
But they didn't underperform, and this was initially a shocker to me!
I was surprised because the thing we had less of did absolutely amazing and the thing we had more of did horrible.
The short answer explaining why our ESG funds did better than their benchmarks is what I said at the beginning of this post, and that is risk. ESG screening typically results in higher-quality holdings that are better prepared to withstand market headwinds.
There is a much deeper answer explaining the phenomenon, but I'll save it for another post.
Last, knowing that most funds do worse than the benchmarks*, you as a client of the firm are likely doing considerably better than the conventional investing of the average investor.
If it ever comes up in conversation, tell your friends/colleagues about your portfolio. Returns don't have to be a taboo subject. If someone is interested and wants to know more, share this post or send them to the main page on our WEBSITE.
Don't worry about explaining fees or specific financial planning strategies. That's my job! Just share the information I've given you.
I appreciate your referral introductions, whether they lead to new business for the firm or not!
Thank you for investing time in your financial well-being. I hope this post helped.
* Most recent SPIVA US Scorecard Summary.