ESG Funds and Companies Pull Ahead

Ethical Investing Remains Popular Despite Downturn

Markets have been volatile during the first half of 2020, but one through line analysts have seen is a steady interest in ESG, or environmental, social, and governance investing.

Investors have stayed focused on ESG funds, pouring $12.2 billion into these socially responsible vehicles so far this year. That’s more than double the amount ESG funds pulled in during the first four months of 2019, despite the US markets’ record highs at the time. Moreover, most of these investments have paid off. The majority of ESG funds—more than 70% —have outperformed their more traditional counterparts from January through April of this year.

The success of ESG investments despite market turmoil has been a surprise to some analysts. However, others see it as a natural outcome of an event like the pandemic, since investors are looking for companies that are resilient and focused on sustainable, long-term success.

Kroger Outpaces Competitors

Grocery store chain Kroger Co. (KR) committed to several measures to assist employees affected by the pandemic, including more money for frontline workers and paid sick time for quarantined employees. Kroger, which has a higher ESG score than competitors Costco Wholesale Corp. (COST) and Walmart Inc. (WMT), outperformed those companies during the period from February 19 to March 23, with Kroger shares increasing by 5.2%,.Costco and Walmart shares fell by 12% and 2.9%, respectively.

Integrity Growth & Income Fund Class A, an ESG fund that invests in companies that show “evolutionary innovation” and “ethical business practices,” found itself less vulnerable than its competitors in the large-cap value and growth stock funds category. Integrity has dropped 8.8% so far this year, in comparison to a category that’s tumbled 11% overall.

As awareness of social responsibility issues has increased, so has the number of ESG-focused funds. Since the beginning of 2015, the number of ESG funds has almost tripled, with 307 such vehicles now available.

Some Remain Skeptical of ESG Investments

One criticism of ESG portfolios is that they usually contain a significant allocation of big tech companies, like Microsoft Inc. (MSFT), Tesla Inc. (TSLA), and Alphabet Inc. (GOOGL). Many of these companies have performed better than the broader market so far this year, which has helped buoy ESG funds’ success.

Criteria and ratings for ESG companies are also somewhat ambiguous. Rigorous, comprehensive, and congruent standards for ESG businesses haven’t been adopted across the board, with different rating agencies valuing sustainability and ethical categories differently.

Despite these critiques, ESG investing has made its mark. Investors appear to increasingly value ethical and sustainability concerns—and managers, regulatory bodies, and companies are paying attention.

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