Here’s More Evidence That ESG Funds Outperformed During the Pandemic

Long criticized as a poor way to make money, many ESG-focused funds beat the overall market amid Covid-19 shutdowns, according to S&P Global.

Angel Garcia/Bloomberg

Angel Garcia/Bloomberg

Good corporate governance has been largely good for investors’ pockets during the Covid-19 pandemic.

In the first year of the pandemic, large funds with environmental, social, and governance criteria outperformed the broader market, according to a report published this week by S&P Global. It’s the latest of such analyses to suggest that ESG risks matter for investment performance, at least during a pandemic.

S&P’s analysis included 26 ESG exchange-traded funds and mutual funds with more than $250 million in assets under management. From March 5, 2020 to March 5, 2021, 19 of the funds grew between 27.3 percent and 55 percent, outpacing the S&P 500 index’s 27.1 percent rise, according to S&P.

While ESG investing has often been criticized as failing to maximize returns, S&P’s analysis is the latest piece of mounting evidence that such funds outperformed their peers and the broader market during the pandemic. Morgan Stanley, Morningstar, academic researchers and others have offered similar analyses that suggest ESG-focused funds and companies were better shielded from the downside of the pandemic.

“The performance trade-off has been if not the biggest, one of the biggest myths around sustainable finance,” Matthew Slovik, head of global sustainable finance at Morgan Stanley, said in an interview. “I think that more and more research, whether it’s from the Morgan Stanley Institute for Sustainable Investing, from S&P, from Oxford or Harvard or others are showing that sustainable investing can in fact, perform and deliver stronger risk-adjusted returns.”

[II Deep Dive: ESG Index Funds Are Outperforming (Mostly)]


S&P defined “ESG-focused” funds as those that screen for criteria such as good governance practices, sustainability scores, disclosure practices, fossil fuel exposure, adherence to religious principles, and workplace diversity. Of the 26 ESG funds included in the analysis, S&P said Parnassus Investments’ Parnassus Endeavor Fund saw the biggest gains with 55 percent growth. The fund has almost $3.6 billion in assets and is the Parnassus fund with the strictest ESG criteria, Parnassus founder and chairman Jerry Dodson said.

Dodson, a pioneer of ESG investing, founded the San Francisco-based firm in 1984. Parnassus now manages about $38 billion in assets and does not invest in companies that make 10 percent or more of their revenue from various sectors, including fossil fuels, weapons, alcohol, and gambling.

Dodson, who was lead portfolio manager of the Endeavor Fund until he stepped down in January, said in an interview with Institutional Investor that the “pendulum has swung completely” on ESG investing. He recalled the criticism Parnassus received in its early days from critics who said investing in socially responsible companies was not a good way to make money.

Dodson acknowledged that one year of performance is not a long enough timeframe to draw major conclusions from, but added that the recent data presents a strong hypothesis that an ESG focus may increasingly be a competitive advantage. He said he expects more funds to position themselves as ESG-focused in the future, but questioned their degree of commitment to the principles.

“That’s the big difference. It’s up from being very few people doing this to many saying, ‘Hey, everybody likes this,’” Dodson said by phone. “Unfortunately, a lot of them are not sincere about making a positive impact on society, on the economy. They just do this as a marketing device, which is disheartening.”

Dodson said he expects ESG-focused funds to become even more popular as younger generations begin to invest more. However, he also expects some funds to continue use ESG as a marketing mechanism.

As for the Endeavor Fund, it’s heavy on information technology stocks like chipmakers Micron Technology and Applied Materials. The fund also has significant holdings in FedEx, The Gap, Hanesbrands, and financial firms, including Charles Schwab and Capital One. Dodson described the investment strategy as value-oriented over the long-term with a commitment to socially responsible values.

“If you look at companies and buy them when they’re undervalued, by our criteria, and have a positive impact on society, eventually, you’re going to do well,” he said. “That’s the way we look at it.”

Like Dodson, BlackRock CEO Larry Fink has also predicted a rising trend in the ESG space, and he identified 2020 as an accelerant, particularly with regard to sustainability-focused companies and funds.

Fink noted in his 2021 annual letter to CEOs that investors in mutual funds and ETFs put $288 billion in sustainable assets globally between January and November of 2020, a 96 percent increase from the year prior.

“The creation of sustainable index investments has enabled a massive acceleration of capital towards companies better prepared to address climate risk,” he said in the letter. “As more and more investors choose to tilt their investments towards sustainability-focused companies, the tectonic shift we are seeing will accelerate further.”