The Takeaway
52 of Morningstar's 69 ESG-screened indexes (75%) outperformed their broad market equivalents in 2020.
ESG index outperformance is not just about sector bias. For example, the Morningstar Global Markets exUS Sustainability Index owes far more of its five-year outperformance to security selection than sector
ESG screens have recently been more successful outside the U.S.
Sustainable investing experienced a milestone year in 2020. The coronavirus pandemic and its societal impact, the global movement for racial justice, and the ongoing threat of climate change all reinforced the relationship between investing and environmental, social, and governance-related issues. "Stakeholder capitalism” became an increasingly mainstream concept. And investors sent record capital flows to ESG funds, pushing global assets past the $1 trillion mark. Regulators, especially in Europe, continued to provide important impetus, while efforts to improve and standardize ESG reporting and data, such as the Sustainability Accounting Standards Board, the Task Force on Climate-related Financial Disclosures, and the Global Reporting Initiative gained steam.
Sustainable investing also enjoyed a generally strong year from a return perspective in 2020. That’s important because of the persistent perception that ESG-based investing requires a performance sacrifice. Another common assumption is that ESG screens have done well lately because they skew toward the technology sector, which has led the market, and away from energy, the biggest laggard.
An examination of Morningstar ESG-screened indexes' risk and return history paints a positive picture— in 2020 and over the past five years. While relative returns certainly shift, the downside protection demonstrated by ESG indexes supports the notion that ESG risks are financially material.
©2022 Morningstar. All Rights Reserved. The information, data, analyses and opinions contained herein (1) include the proprietary information of Morningstar, (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar has not given its consent to be deemed an "expert" under the federal Securities Act of 1933. Except as otherwise required by law, Morningstar is not responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. References to specific securities or other investment options should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment. Past performance does not guarantee future results. Before making any investment decision, consider if the investment is suitable for you by referencing your own financial position, investment objectives, and risk profile. Always consult with your financial advisor before investing.
Indexes are unmanaged and not available for direct investment.
Morningstar indexes are created and maintained by Morningstar, Inc. Morningstar® is a registered trademark of Morningstar, Inc.