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ESG Investing Performance Intelligence for Asset Managers

ESG-screens demonstrate a proclivity for less volatile companies with stronger competitive advantages. Find out why.

By Dan Lefkovitz

Read Time: 4 Minutes

Although interest in sustainable investing continues to grow, the fear of missing out on returns still inhibits many investors. In theory, any limiting of an investor’s opportunity set could have negative consequences. But in practice, investments screened on environmental, social, and governance (ESG) criteria have performed well.

An updated and expanded study of Morningstar’s 56 unique ESG-screened indexes finds that performance across the range tends to be strong. ESG indexes also favor companies with healthier balance sheets, stronger competitive advantages, and lower volatility than their mainstream counterparts. These findings are consistent with other Morningstar studies observing that sustainable funds score well on factors linked to a positive long-term investor experience.

The study also supports the view that ESG considerations are material to companies’ financial results. Environmental stewardship is not just good for the planet—it’s also about controlling costs, avoiding damaging incidents, and positioning for tomorrow's economy. Treating workers well benefits society but also helps a company attract and retain talent—critical in the knowledge economy. Good governance leads to better corporate decision-making. Companies that consider ESG are likely strategic in nature—focused less on beating next quarter's earnings and more on creating an enduring franchise.

Morningstar’s ESG indexes help answer a key question

Morningstar now offers 56 unique indexes in which ESG criteria is the primary driver of security selection. From the original Morningstar Sustainability Index Family, methodologically aligned with the Morningstar Sustainability Rating TM for funds, the range has expanded to include a Sustainability Leaders family, a Sustainable Environment Family, Low Carbon Risk indexes (mirroring the Morningstar® Low Carbon Designation TM ), an assortment of focused sustainability indexes, and three “impact” indexes: Women’s Empowerment, Minority Empowerment, and Societal Development.

The indexes are all focused on equities and, with the sole exception of Women’s Empowerment, reliant on company-level ESG assessments from Sustainalytics, which rates 10,000 firms across the globe from a broad ESG perspective and 4,000 on the basis of carbon risk. Even indexes recently constructed have returns modeled several years prior based on historical Sustainalytics’ data. Because the indexes tend to be constrained in their sector and regional weights in order to offer market-like exposures and serve as credible alternatives to conventional counterparts, they can help answer the question: How do companies that score well on ESG criteria compare with their peers on a returns and holdings basis?

ESG investing performance results

We found that 41 of the 56 Morningstar’s ESG indexes outperformed their non-ESG equivalents (73%) since inception. ESG screens largely added value in Europe and Asia, thanks to stocks like Vodafone, Allianz, Taiwan Semiconductor, and Sony. The picture in the U.S. market was more ambiguous. Stellar performers in recent years, such as Apple,, and Facebook, are not as strong from an ESG perspective, though better-scoring companies, such as Intel and Medtronic, lifted the returns of some U.S.-focused indexes.

The results are even more encouraging when the indexes are measured for their exposures to various risk factors linked to a positive long-term investor experience. This analysis relies on the Morningstar Global Risk Model and compares indexes to their counterparts on the basis of economic moat, financial health, and volatility. The study concludes that Morningstar ESG indexes tend to select companies that are less volatile and possess stronger competitive advantages and healthier balance sheets than their non-ESG equivalents.

The persistent relationship between ESG and these factors should put doubters on notice. Sustainable investing is not just about values.

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Dan Lefkovitz is a strategist for Morningstar's Indexes product group.