Key concerns regarding equity investing based on environmental, social and governance factors surround the risk and return effects they have on portfolios. Do more socially responsible companies perform better or do such screens whittle down the opportunity set so far that diversification is limited? These concerns affect institutional and private investors alike.
Similar risk: The Sharpe ratios of the S&P 500 ESG factor-weighted index track closely to those of the standard S&P 500 index, with periods of separation of less than a quarter point. Risk-adjusted returns for both categories have been declining as rising rates lower the risk premium.
Favorable returns: The distribution of rolling three-year returns of the ESG index has shown more upward variability than the S&P 500. The median and average returns also favor ESG.
Good companies, better returns: Companies with better ESG ratings* have shown better returns on invested capital over both three and five years.
Higher rated: Sustainable funds show better risk/return profiles compared with the total universe based on Morn- ingstar's ratings methodology.
*ESG rating ranks based on Bloomberg's ESG Disclosure Score. Sources:
Bloomberg LP, MSCI Inc., Morningstar Inc.