Critics of ESG mandates believe that the exclusion of smaller allocations to some larger and more stable companies will lead to higher volatility and lower returns relative to less-constrained allocations. For a while they were right. A comparison of trailing three-year risk-return data of the S&P 500 and its ESG counterpart shows less risk relative to returns for the broad equity index.
The S&P 500 ESG index, which opened in March 2009, returned slightly better than the unscreened index, but assumed more risk into 2014. Since then, the ESG index has lagged the S&P 500, while risk has fallen more in line.