Invest Retirement

Why The Hottest Investing Strategy This Year Is ESG

Dayana Yochim  |  October 23, 2020

Investors have funneled more than $30 trillion (and growing!) into socially responsible investments. Here’s why.

Investing for good — aka socially responsible investing — is going gangbusters this year. More people than ever are investing in so-called ESG mutual funds that contain companies that operate in a way that upholds certain environmental, social or governance values.

It’s not that ESG investing is new. The first sustainable mutual fund hit the market in the 1970s. But 2020 is shaping up to be the year for socially responsible investing. 

Since the beginning of 2020, ESG stocks have returned 8.3% versus the S&P’s 5.3% return.

“[Investments into] our socially responsible managed portfolio has seen the fastest growth since the beginning of the year — 350% — relative to our other robo portfolios,” says Lindsey Bell, Chief Investment Strategist for Ally Invest. On the self-directed investing side of the business, the number of Ally brokerage accounts that hold ESG funds has more than doubled. 

Good, and good for you

The long-held knock against ESG investing was that you give up profits when you invest in purpose-driven companies. 

So much for that old saw. What investors have discovered is that socially conscious investing isn’t just a way to align your values with your investment dollars; it’s also a strategy that delivers superior returns.

McKinsey & Company study has been studying the correlation between gender, ethnic and cultural diversity and financial outperformance for years. Its analysis shows that the business case for committing to diversity has grown stronger over the years. Its 2019 analysis found that “companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile — up from 21% in 2017 and 15% in 2014.”

That positive correlation has trickled down to investors’ portfolio returns. In the past two years ESG stocks (as measured by the MSCI USA ESG Leaders Index) have outperformed the S&P 500 index. And since the beginning of 2020, they’ve returned 8.3% versus the S&P’s 5.3% return.

Commitment counts

Another boon to individual investors is the long-term focus of ESG investing. 

We’ve all had it drilled into us that it’s better to hold on to your investments instead of selling at the first (or third or 19th) sign of trouble in the overall market. Investing with a long-term focus is a built in part of the ESG investing strategy.  

It starts with how investment managers analyze companies to hold: “We assess how committed a company is to long-term stewardship for all stakeholders — employees, partners, customers,” says Liz Simmie, Chief Investment Officer and co-founder of Honeytree Investment Management, one of the few female-led responsible asset management firms. “It’s a good way to invest because it naturally makes you focus on the long-term.”

“If somebody is investing in a fund where they believe in the mission, they might be more likely to stick it out during difficult times in the market.”

Individual ESG investors have also shown they’re more willing to ride out tough market conditions. In August, we talked to Nicole Connolly, head of ESG investing and a portfolio manager at Fidelity Investments on the HerMoney podcast. She noted that at Fidelity, people invested in ESG funds were more likely to keep their money in the market than people who weren’t invested in ESG. 

“We’ve kind of had the thesis at Fidelity that, if somebody is investing in a fund where they believe in the mission — they believe in the cause of that fund — that they might be more likely to stick it out during difficult times in the market,” Connolly said.

What’s interesting about the surge in interest — and money — into ESG investing is that it’s consumers, not institutional investment firms, driving the trend. “We still have to break down the traditional beliefs in investment portfolio construction to get over the hangups that pros in the industry have,” Simmie says.

In the meantime, it looks like retail investors will continue to drive the ESG trend by voting with their values. 

Tune into the HerMoney Podcast for more on ESG investing: 

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