In these trying times, some dismiss sustainable investing as a luxury, several rungs below securing retirement savings on investors’ hierarchy of needs. In fact, the coronavirus crisis is yet another reminder that investing is impacted by a wide range of forces.
As argued in a recent The Wall Street Journal article, the crisis has also reinforced the importance of factors “paramount to ESG investors, [such as] disaster preparedness, continuity planning, and employee treatment through benefits.” There’s also the fact that incorporating environmental, social, and governance, or ESG, criteria into the investment process contributes to risk and return.
Earlier this year, Morningstar published a wealth of research on the nexus between ESG and risk. One study, “ESG Indexes Protect on the Downside,” concluded that 72% of Morningstar equity indexes that incorporate ESG screens lost less than the market during down periods for the five years through the end of 2019. It also found that the ESG indexes are more likely to select companies that are competitively advantaged and financially healthy, which undoubtedly contributed to their ability to reduce volatility.
Obviously, much has changed in markets since the end of 2019. The rapid, violent sell-off in first-quarter of 2020 offers an excellent follow-up opportunity to look at the performance of our ESG-screened indexes. We found that 51 of Morningstar’s 57 ESG-screened indexes, or 89%, outperformed their broad market equivalents in the first quarter of 2020. This is consistent with the conclusions that Morningstar director of sustainability research Jon Hale outlined in his article, “Sustainable Equity Funds Are Outperforming in the Bear Market.”