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Does ESG Investing Work in a Coronavirus World?

Thursday, May 28, 2020 07:55 AM | Nick Dey

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Does ESG Investing Work in a Coronavirus World?

Throughout the coronavirus pandemic, new and experienced investors alike have been flooding to the market to protect their savings and find the winning investments. And while many investors make their final decision on an investment based on the company’s trends, an increasing number of investors are refining their investment options further by a preference for ESG investing.

ESG investing, which stands for Environmental, Social, and Governance, is a type of investing in which the investor chooses to place their money in opportunities that are both profitable and adhere to a set of standards for in those three areas. ESG is related to the socially responsible and ethical investing movements.

While there is a lot of gray area as to what each individual investor would consider important when compiling a list of potential ESG investments, there are principles for responsible investing that they can follow to make their own decisions. Investors looking to start using ESG in their investment process should consider a company’s social goals which can often be found on an Investor Relations page along with statements about environmental impact, and how well executives are compensated in comparison to the employees at the bottom of the ladder.

Additionally, this step can be made simpler for the investor if they choose to invest in ETFs that have an expressed ESG goal. You can read the objectives of the fund, review its holdings, and compare its historical and projected performance with other ESG options in order to find which ones are right for you.

Lofty ideas about social responsibility aside, you can’t help but wonder: How have ESG investments actually been performing during the pandemic and what will their recovery look like come vaccination day?

How ESG investments are doing compared to the rest of the market can be a difficult question to answer when you considering that there are a large number of ESG investing options out there, all with their own criteria on what ESG even is.

However, when comparing some of the largest ESG ETFs, iShares MSCI Global Impact ETF (SDG), USA ESG Select iShares MSCI ETF (SUSA), and USA ESG Optimized iShares MSCI ETF (ESGU) with the S&P 500, we can get some idea  how ESG ETFs have been faring. The chart below shows that year-to-date the ESG investments have each outperformed the S&P 500 by two to three percentage points.

And while the speed of recovery is a highly debated topic, there are important distinctions that can help us begin to grasp how ESG investments will differ from others. The primary driver here will be that the majority of oil companies, unsurprisingly, do not meet the environmental criteria needed to be included in these ESG ETFs. This means that losses in the energy sector from the Russian-Saudi trade war were effectively avoided. Knowing this, we can deduct that ESG investments will also miss out on most of the gains in the energy sector that things get back on track.

Despite not including oil and other markets, we can deduce that, when done right, ESG investments can outperform the market while still being diversified enough to limit risk. That said, these three ESG funds were chosen with the privilege of hindsight and there is no way to know if these, or other, ESG funds will be as successful in the future.

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