Why have ESG funds been outperforming the market?
Stock Market Analysis

Why have ESG funds been performing better in this sell-off?

ESG funds have been weathering the storm better than most, outperforming their traditional counterparts and the market as a whole through this dip

Welcome to the stock market, where everything is made up and the points don’t matter. 

As the greatest week for the market since 1938 has been entered into the books, the fastest bear market in history becomes the shortest as the Dow (NYSEARCA:DIA) bounces 20% from its 52-week lows. All while unemployment figures are at a figure never before seen in U.S. history. We are left staring at a rising market and a global recession. In lieu of an attempted explanation of the irrationality that has taken hold of Wall Street, I’m instead going to talk about something that may actually follow the rules of logic somewhat: ESG funds and how they are outperforming their traditional peers. 

ESG is trending up

ESG stands for environmental, social and governance and represents investing with an eye on sustainability across this triumvirate of causes. It is one of the most prevalent trends on Wall Street in the last few years, both amongst millennial and institutional investors alike. ESG funds took in over $20 billion in new money in 2019, nearly 4 times that of the previous year.  Blackrock (NYSE:BLK), the world’s largest fund manager with $7 trillion in assets at the start of the year, has been one of the most outspoken voices on the matter. 

In January, CEO Larry Fink stated that “a fundamental reshaping of finance” was underway as issues like climate change “become a defining factor in companies’ long-term prospects.” The fund manager put its money where its mouth is, outlining plans to double the number of sustainable-ETFs it offers to 150 and cutting any companies in its portfolios which derive more than a quarter of revenues from thermal coal. A well-timed move considering the position the energy-sector has found itself in currently. 

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It’s not just the money-managers that have a new sustainable focus either. Visa (NYSE:V) recently announced it was running on 100% renewable electricity, Amazon (NASDAQ:AMZN) CEO Jeff Bezos has committed $10 billion to fight climate change, and Apple (NASDAQ:AAPL) has been pioneering a number of environment-focused initiatives. Add to this consumer trends which have sent green stocks like Tesla (NASDAQ:TSLA), Beyond Meat (NYSE:BYND) and NIO (NYSE:NIO) on a year-long rollercoaster ride and it is plain to see that ESG has taken a firm grasp of Wall Street’s collar, and it doesn’t plan on letting go anytime soon.

Why have ESG funds been outperforming the market? 

In a report from Bloomberg, ESG funds fell on average of 12.2% in 2020, compared to the S&P 500’s (NYSEARCA:VOO) demise of 23.2% in the same timeframe. There are a number of reasons why ESG funds are performing better than the market right now. Let’s begin with the glaringly obvious: oil companies. The industry has been taking a hammering on both sides thanks to the lack of demand due to the coronavirus and a pricing war between Saudi Arabia and Russia, which has led to the Saudis flooding the market and prices descending to 2002 levels. This has put the squeeze on U.S. oil producers like Occidental Petroleum (NYSE:OXY) and Exxon Mobil (NYSE:XOM), whose valuations have nosedived in 2020. 

However, avoiding Big Oil is not the only reason why ESG funds have been outperforming. The ‘G’ stands for governance and it is a major factor when considering the sustainability of operations of a company. Better-governed companies tend to be of a higher standard and boast stronger management. Both handy weapons to have in your arsenal when facing a downturn.  

Lastly, many companies which place an emphasis on ESG related activities tend to be larger. These businesses have the resources to pour into environmental and social efforts, while also maintaining the finances to treat their staff and stakeholders to the highest standard of care. Big companies with strong balance sheets are proven to perform better through downturns in the market. 

Be careful when investing in ESG funds

But before you rush out with your woven-hemp tote bag to fill up on sustainable funds, there are a number of things to take into consideration. Of the roughly 2,800 ESG-focused funds, over 1,000 have been formed since 2015. This current sell-off is a first for them and management will need to adapt while maintaining the standards which dictate their social and environmental focus. 

Another factor is how these companies can manipulate the standards to be looked upon favorably. As ESG investing becomes more popular, management can’t be seen to ignore it or the stock price will suffer. You may remember last August a statement from the Business Roundtable in which a number of top CEOs signed up for a new mission for corporations. Instead of the purpose of a corporation being to increase profits and shareholder value, its mission is to benefit all stakeholders: customers, employees, suppliers, and communities. Some of the signatories include American Airlines (NYSE:AAL) and its long history of labor issues, and Johnson & Johnson (NYSE:JNJ) and its long list of lawsuits, among other nefarious activities (if you have some spare time check out the recalls and litigation section of Johnson and Johnson’s Wikipedia, you can decide for yourself if they are up to ESG standards). 

ESG investing is a burgeoning trend on Wall Street that isn’t going away anytime soon. It tackles future-relevant issues and puts emphasis on companies to meet standards that will better the world as a whole. However, there are loopholes and caveats aplenty. If you are interested in adding it to your investing strategy, make sure to conduct your own due diligence to help you drown out the noise.


MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.

Michael O'Mahony
Michael O'Mahony
Michael is a writer here at MyWallSt. His first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.