Doing Good While Searching For Good Performance

More and more investors want to invest with a purpose and fund issuers are meeting that demand with a raft of exchange traded funds targeting the environmental, social and governance (ESG) themes.

BlackRock, Inc.'s BLK iShares unit, the world's largest ETF sponsor, offers U.S. investors 11 equity and fixed income ETFs focusing on various sustainable investing themes.

What Happened

Data confirm that not only is interest in sustainable rising, but more companies are acknowledging the importance of ESG factors as well.

“Interest in sustainable investing is rising. The average S&P 500 firm cites ESG-related terms in earnings calls nearly twice as often as a decade ago, our text analysis of transcripts show,” said BlackRock in a recent note. “Consumer staples, financials and health care lead the way. See the chart above. Meanwhile, regulation and investors’ desire to do good, mitigate risk or access niche market opportunities is stoking interest just as new benchmarks and products are making ESG investing more accessible across asset classes and regions.”

The iShares MSCI USA ESG Select ETF SUSA, which follows the MSCI USA Extended ESG Select Index, debuted over 13 years ago and today has nearly $723 million in assets under management, making it one of the largest ESG ETFs in the U.S.

Why It's Important

Indeed, investors are allocating more assets to ESG funds.

“Total assets in ESG-dedicated mutual funds and exchange-traded funds in Europe and the U.S. grew nearly 50% from 2013 to 2017, according to Cerulli Associates,” said BlackRock. “We find flows have picked up further in 2018. As more investors factor ESG considerations into their investment decision-making, there is good reason to believe the relationship between ESG and asset performance could further strengthen. We’ve found early evidence that a strong ESG focus may be linked to equity outperformance over time.”

From 2014 through 2017, SUSA outperformed the S&P 500 on an annual basis in three of those four years.

What's Next

ETF issuers have been and will likely continue introducing nuanced ESG funds as well as products that feature exposure to other asset classes, including ex-U.S. markets and bonds. There's evidence supporting the notion that sustainable works with international equities.

“Annualized total returns of the ESG indexes since 2012 matched or slightly exceeded the standard index in both developed and emerging markets (EM), with comparable volatility, our study found,” said BlackRock. “Early evidence also suggests that an ESG focus may offer the greatest rewards in EM, where issues such as shareholder protections, natural resources management and labor relations can be important performance differentiators.”

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