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ESG reins in volatility after rough start

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.