Do you have to give up returns when you opt for responsible investments? That’s an important question for many people who are considering whether to switch to a portfolio more aligned with their personal values.
At PWL, we’re committed to supporting clients who want to give priority to responsible investing. We’ve published a whitepaper and an eBook on the topic where we explore (among other issues) how the returns of environmental, social and governance (ESG) funds stack up against the broader market indexes.
After reviewing dozens of studies, we concluded that a well-diversified portfolio of ESG funds is likely to generate returns similar to those produced by the markets.
In light of that research, we were interested to see how the ESG funds we use in client portfolios have performed during this year’s COVID-19 sell-off and subsequent rebound.
Overall, we found their returns compare favourably to those of exchange traded funds (ETFs) that track the stock market indexes.
Performance in 2020
In Canada, the iShares ESG MSCI Canada Index ETF returned -9.3% this year to June 4, marginally worse than the -8.1% produced by the iShares Core S&P/TSX Capped Composite Index ETF.
For other markets, ESG fund performance was much stronger. In the U.S., the Vanguard ESG US Stock ETF handily outpaced the Vanguard Total Stock Market Index Fund ETF, returning -0.5% versus minus -3.2%. It was a similar story for developed markets outside the U.S. where the Vanguard ESG International Stock ETF returned -8.7% versus -10.1% for the Vanguard Total International Stock Index Fund ETF.
Elsewhere, there was more evidence ESG stocks performed relatively well during March’s sharp sell-off. This infographic and accompanying article show that U.S. stocks deemed by MSCI to be ESG leaders significantly outperformed both the indexes and ESG laggards in the year to March 31.
Of course, this performance data amounts to snapshots and is not a substitute for evidence gathered over long periods of time.
However, this year’s market volatility has been dramatic. It’s reassuring to know our conclusion you likely won’t be penalized for holding a well-structured portfolio of responsible investments has been borne out during these extraordinary months.
At the end of the day, when you look at the dozens of studies on the subject, it appears that a well-diversified ESG portfolio backed by an integration approach is likely to generate a return similar to that of the market. Our report proposes an exchange-traded fund (ETF) portfolio of globally diversified stocks with returns close to the corresponding total market index (neutral index without an ESG approach)