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Investors for the last two years poured money into environmental, social and corporate governance investment strategies.
In 2020, net new assets into ESG funds jumped to $51.1 billion — more than double the year before. And last year, these funds attracted nearly $70 billion in new assets, according to data from Morningstar.
Indeed, investors are increasingly considering more than financial returns when allocating their investment dollars. But at times, investing responsibly comes at a cost. And many ESG investors are seeing their portfolio values decline significantly this year, both on an absolute and relative basis.
The question is: If ESG funds continue to struggle, how patient will investors be?
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Of course, it’s not unusual for investors to grow impatient during periods of sustained underperformance. Although net flows into ESG-designated funds remain positive so far this year, according to data from YCharts, many ESG funds are already experiencing outflows year to date. Fortunately, long-term investors who don’t want to sacrifice their values for performance have many reasons to be optimistic about the future of sustainable investing.
Funds that incorporate ESG into their investment decisions are off to a bumpy start this year. Then again, so is the broad U.S. stock market; the S&P 500 Index, a popular proxy for U.S. stocks, is down more than 10% since the start of 2022, placing the index firmly in correction territory.
It seems there are few places to hide in the current market environment. And sustainable funds — particularly those that consider environmental issues — are having even more trouble keeping up with their non-ESG counterparts.
So, what’s driving ESG underperformance this year?
Few areas of the market are doing well year to date. However, one bright spot has been the energy sector. Oil prices have spiked to record highs recently because of ongoing supply chain issues and recent geopolitical events. Thus, the S&P 500 Energy Sector is up over 28% year to date on a price-return basis.
At the same time, big tech names have sold off sharply as investors, of course, anticipated that the Federal Reserve would raise interest rates in the near term. The S&P 500 Information Technology Sector is down more than 16% this year as a result.
This drastic divergence in sector performance is largely responsible for the recent underperformance of ESG funds. Many ESG funds avoid the carbon-intensive energy sector and instead overweight technology names. While these …….
