While indexes incorporating environmental, social and governance (ESG) factors have struggled recently, there have been bright spots according to Morningstar Indexes recently published annual sustainability study.
According to the analysis, just 27% of Morningstar sustainability indexes outperformed their equivalents that don’t incorporate ESG in 2022, primarily driven by the poor performance of technology stocks and outperformance of the energy sector. This compares to 57% outperformance and 75% outperformance for sustainability indexes in 2021 and 2022 respectively, as cited in Morningstar Indexes sustainability analysis.
Yet, there were notable bright spots for ESG:
- ESG indexes focused on value stocks, dividend payers and quality companies with low valuations outperformed the broad equity market in 2022, though they lagged similar approaches that don’t use ESG screens, in part due to less energy sector exposure.
- ESG indexes focused on gender equality and renewable energy outperformed in 2022, boosted by above-market weights in energy and defensive sectors like healthcare, consumer staples and utilities.
- Despite poor performance for sustainability indexes in 2022, five-year numbers remain strong. From 2018 to 2022, 78% (99/127) of Morningstar sustainability indexes with five-year performance histories beat their equivalents.
Dan Lefkovitz, Strategist, Morningstar Indexes
“Our analysis of our range of sustainability indexes underscores the fact that ESG returns are as diverse as the field itself. Sustainable investing includes a wide range of approaches, motivations and exposures. Investor outcomes reflect strategy-specific factors in the context of the market environment. It is important for investors to better understand nuances within sustainable investment approaches in order to craft a personalized ESG strategy.”
©2023 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.