ESG keeps pulling in lots of money, even as strategy is no longer outperforming as much

Published Sat, Oct 30 20219:56 AM EDTUpdated Sun, Oct 31 20218:20 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

ESG investments have lost some of their pop. But they should still see strong inflows, even though they have outperformed at a slower pace this year. The stocks that are best-rated by ESG rating firms still command a premium, as more and more money is flowing into funds that focus on ESG, short for environmental, sustainable and governance issues. According to Bank of America, $3 out of every $10 going into global equities is being directed into ESG. Through September, global ESG funds took in $230 billion this year, up 111%. RBC ESG strategist Sara Mahaffy says the performance this year of dedicated ESG equity funds has not been as strong as recent years. "The track record so far this year has been a little bit more mixed," she said. "The percentage of funds beating their perspective benchmarks has been weaker than prior years. Three- and five-year stats still look in favor of sustainable funds but year-to-date they look more mixed." Year-to-date, 51% of actively managed sustainable funds were beating their benchmarks, compared to 54% over three years, according to RBC. Just a third were beating as of July of this year. As of late September, U.S. actively managed sustainable funds for the year so far had a median absolute return of 20.9%, compared to 19.7% for U.S. actively managed large cap stock funds. But for 2020, the sustainable funds had a relatively higher median average return of 19.5%, compared to 14.2% for other equity funds. "I wouldn't say it's been weak," she added. "The broader theme is we're seeing a shift towards sustainable investing." The iShares MSCI USA ESG Select ETF was up 24.9% year-to-date. The fund invests in companies from a universe of S & P 500 and Russell 1000 companies. The Vanguard FTSE Social Index Fund Admiral, which also invests in U.S. stocks, has among its top holdings Apple, Microsoft , Alphabet , Amazon and Facebook , now Meta Platforms. The fund was up was up 21% year to date, versus the 22.4% gain in the S & P 500 this year so far. Mahaffy and other RBC strategists have tracked the leading highly-rated stocks in ESG funds, but they also look for opportunities among stocks that have good ESG profiles but are not yet widely held by the funds. Bank of America analysts found that on an individual stock basis, the top-rated ESG stocks are being granted less of a premium in the market this year, though they have improved recently. "The premium has come down significantly from the peaks and trends you had over the last couple of years," said Panos Seretis, ESG strategist at Bank of America. Seretis pointed to an analysis of the relative price-t