The first quarter of 2023 demonstrated a return to form for ESG. Even as the big splash from the Silicon Valley Bank collapse pulled down investments in a broad cross-section of sectors, funds that integrate ESG into their investment process outperformed non-ESG funds.
As noted in a recent Reuters overview, both net assets and performance were strong for ESG:
Analysts say ESG funds have been helped by a rebound in technology stocks that many funds hold, and policy initiatives such as the U.S. Inflation Reduction Act, which support the case for buying stocks that could benefit from a lower-carbon economy.
"The other real driver is the strong demand from asset owners and retail clients. There remains robust demand to be invested along ESG thematic ideas such as biodiversity and climate transition."
What Does This Mean for Investors?
A wide range of headlines and assessments in late 2022 pointed to the underperformance of funds that integrate ESG as a sign that the discipline does not hold up. That stretch was marked by widespread volatility and an energy crisis precipitated by the war in Ukraine. The ensuing rhetoric that ESG had "failed" ignored a significant track record of strong performance, and it used a narrow window in time to define the long-term potential of ESG.
The outperformance in Q1 2023 underscores that – as with all investments – there may be ups and downs, but over a reasonable investment time horizon, integrating ESG does not lead to underperformance.
Investors interested in ESG but hesitant due to the headlines should know the real numbers behind long-term performance trends.
What Should Financial Advisors Do?
Be wary of sensationalist or politicized headlines about ESG – whether positive or negative. ESG is data, and its outcomes are data-driven. Just like any other investment, explore the long-term track record of a product or strategy and be prepared with the facts when clients are ready to have the discussion.
If clients have questions about broader ESG topics, we recommend using the ESG conversation starters from our digital products sections.