For years, there have been mutual funds and ETFs that focused on companies that score well on various environmental, social and governance metrics. But they’ve often lagged the broader market.

For example, the iShares ESG MSCI USA (ESGU), Vanguard ESG US Stock (ESGV) and FlexShares STOXX US ESG impact (ESG) ETFs are each up about 10% over the past year, easily outperforming the Dow and S&P 500 over the same time frame.
Index provider MSCI (MSCI) even ranks companies based on their ESG performance. Some of the top firms include Microsoft (MSFT), Texas Instruments (TXN), Home Depot (HD), Hasbro (HAS) and Owens Corning (OC).

And according to research from mutual fund tracker EPFR, funds with socially responsible or environmental, social and governance mandates attracted more new money last week for the 11th time in the past 12 weeks.

EPFR said that so far this year, ESG funds have brought in $61.6 billion in new money.

“One of the reasons you are seeing investors embrace ESG is that this no longer about just avoiding companies that are doing bad things and controversial sectors,” said Blake Pontius, director of sustainable investing and portfolio specialist for William Blair’s global equity team.

Doing good can also mean making more money

“There has been a change in consumer preferences. Millennials are willing to pay more for a product based on how ingredients are sourced, how companies treat their employees and how energy efficient they are,” Pontius said in an interview with CNN Business.

It’s smart business practice to be more inclusive, he added, noting that gender and ethnic diversity on a company’s board and management team often leads to better stock performance over time.

“Social themes were already becoming more important and relevant to investors, and that’s been accelerated and thrust into the spotlight with concerns about injustice,” Pontius said.

Larry Fink, CEO of iShares owner BlackRock (BLK), has also stressed the importance of investing in sustainability and other socially important causes.

The trend is resonating during the Covid-19 pandemic, particularly as millennials and members of Gen Z are investing in stocks on apps like Robinhood.

“Environment, social and governance are themes that are secular, driven in part by younger generations and are likely to come even more to the fore as a crisis typically brings great changes with it,” said Sebastien Galy, senior macro strategist with Nordea Asset Management, in a report last week. “The status quo is no longer accepted.”

ESG is now a fixed income trend too

Bond investors are hopping on board the ESG bandwagon as well.

S&P Global Ratings said Monday that it expects so-called social bonds to be the fastest-growing segment of the sustainable debt market in 2020.

Issuance in this category, which includes bonds for projects to help improve food security and increase access to education and health care, has more than quadrupled to nearly $50 billion so far this year, according to S&P.

“Recent growth in social bond issuance indicates that the COVID-19 pandemic has not turned issuers’ or investors’ attention away from sustainable finance — rather, interest seems to be growing,” S&P said in the report.

S&P sustainable finance analyst Lori Shapiro added that big banks and other large corporations are likely to be even more active in the social bond market as the year progresses.

S&P rival Moody’s shares that assessment.

“The coronavirus pandemic has vividly illustrated how a social issue like a public health shock can have severe macroeconomic and credit implications,” said Matthew Kuchtyak, analyst at Moody’s Investors Service in a report Wednesday.

“Entities demonstrating a stronger capability and willingness to address such ESG risks will increasingly differentiate themselves from their peers over time,” he added.

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