Insights

ESG (Socially Responsible) Investing Goes Mainstream

ESG (Socially Responsible) Investing Goes Mainstream
November 20, 2020

We may well look back at 2020 as the year Environmental, Social, and Governance investing (“ESG” investing) became mainstream.  The year started off with large investment firms like Blackrock and State Street committing to use their massive scale to vote against boards that lagged behind on ESG standards.  As the year progressed, dedicated ESG funds saw more inflows than in any prior year.  Whereas such funds used to be just a percent or two of total flows into funds, in the third quarter of this year, ESG funds represented about 10% of all flows into U.S. stock and bond funds.


 *Through 9/30/2020.  Source: Morningstar Direct

There have been challenges as well this year, notably from the current administration.  Recently the SEC made it harder to propose corporate shareholder resolutions, and the Department of Labor passed a new rule which allows funds to be selected in retirement plans only based on “pecuniary” considerations (e.g. factors expected to have a material effect on risk and/or return).  The final rule doesn’t explicitly mention ESG funds in the body of the final rule, but the effect could be to make companies more hesitant to use such funds.  Overall, however, it will be hard to hold back the tidal wave of interest in such funds, and the government’s position is likely to become more supportive under the new administration.

Plum Street ESG Portfolio Update

Our long-term expectation is that ESG portfolio returns will be comparable to their “traditional” peers (i.e. the overall market), but the performance of Plum Street Advisor’s ESG portfolio[1] has been very strong since its inception one year ago.  The portfolio managed through the difficult months of the pandemic, and ended its first year (ending October) with a return of 5.6%.  This return compares favorably to the Morningstar Moderate Risk benchmark return of 4.5% over the same period.

ESG funds overall benefited from a tailwind this year, as stocks they tend to hold less of (like energy stocks) did poorly, and stocks they tend to hold more of (like technology stocks) did exceptionally well.  Within our portfolio, we saw outperformance of sustainable funds over their traditional peers in every stock fund but one, while the bond funds’ performance was more mixed.

The Plum Street ESG portfolio holds a highly diversified mix of stock and bond funds and covers US, international, and emerging markets. The highest returns over the past year were US-based stocks, followed by emerging markets.  Every fund we held had positive returns, except for the Nuveen ESG Large Cap Value Fund.  The strongest performer was the iShares MSCI Global Impact ETF, which invests in companies that seek to address some of the world’s major social and environmental challenges.  It was up 27% for the year, led by its investment in Tesla which gained over 600% over the past 12 months, and Denmark’s Vestas Wind Systems which is the largest wind turbine company in the world, which advanced over 100%.

Thanks to all of you that have indicated interest in socially responsible investing. We look forward to continuing to discuss these options with all of our clients.  At Plum Street Advisors, we can build a customized implementation of ESG investments – from tilts toward lower carbon-emitting companies to the all-ESG portfolio discussed above – at a comparable cost of investment to traditional portfolios.  Please reach out to us if this is an area of interest.

 

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[1] the Plum Street Advisors ESG Portfolio is a strategy employed using only investments or funds whose focus is Environmental, Social, and/or Governance (“ESG”) investing (with the exception of the inflation-protected bond allocation).
General Disclaimers
Certain information herein is based on data provided by third party sources and, although believed to be reliable, has not been independently verified, and its accuracy or completeness cannot be guaranteed. There is no guarantee of performance, and past or projected performance is not a reliable indicator of future performance. Future performance may be materially different than past performance, causing substantial or total loss of investment. Actual returns will be less due to advisory fees and other brokerage or custodial costs. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered.
The Morningstar Moderate Risk benchmark is designed to meet the benchmarking needs of target risk investors by offering an objective yardstick for performance comparison covering moderate equity risk preferences.