Many companies pledge to do their best to adopt business practices that are conscious of environmental, social and governance issues. For others, it’s a driving force in their business decisions. Investors can opt to support these sustainability-focused companies by using ESG funds in their portfolios, and demand for such investments is growing.
Despite misconceptions that sustainable investing appeals only to women and millennials, a 2019 report by Morningstar found that 72 percent of the U.S. population expressed at least a moderate interest in this purposeful approach to portfolio fund selection. But demand and demographics of investors aren’t the only factors changing about ESGs. Returns are evolving, too.
In previous years, it was understood that investors should be willing to compromise financial returns in favor of bringing awareness to environmental, social and governance issues. However, as companies have become more aware of their sustainability responsibilities and factors in ESG indexes have improved, you no longer have to leave money on the table to support your personal values.
From 2017 to 2019, ESG indexes were on par with or outperformed S&P or non-ESG indexes. The improvements in ESG performance means advisors can confidently include sustainable investments in more client portfolios. If investors have had an interest in ESGs in the past but hesitated to pull the trigger due to possible impacts on financial returns, this might just be the year to test them out. After all, these are not the ESG funds of the early 2000s.