After outperforming benchmarks during the first quarter of this year, interest in environmental, social, and governance (ESG) investing is surging, though questions remain.
ESG exchange-traded fund (ETF) investing “should at least double” this year, according to Tom Lydon, the chief executive at ETF Trends who went on CNBC’s ETF Edge last week. “There is definitely more interest there,” he added.
Investor interest has certainly spiked in recent years. Last year, sustainable open-ended funds and ETFs in the US attracted $20.6 billion in assets, a record nearly four times the previous amount, according to Morningstar.
But Lydon called the record amount a “head scratcher,” given that it does not even come close to the amount generally held in ETFs: a whopping $6 trillion in the US.
Regardless, Lydon is betting that challenges around the coronavirus crisis and the George Floyd protests will increase investor interest in companies that improve their corporate values.
“Racism has no place in America and the events of last week kind of give corporate America an opportunity to reaffirm that their clients, their employees, their shareholders where they stand on this,” Lydon said.
But some critics say that many ESG funds are essentially tech growth funds, given that outperformers have a heavy allocation toward companies such as Apple and Microsoft.
For example, about 14 out of 17 ESG exchange-traded and mutual funds with more than $250 million in assets under management lost less value than the S&P 500 index in the first quarter, according to S&P Global Market Intelligence.
The top performer on the list was the tech-heavy Nuveen Winslow Large-Cap Growth ESG Fund, which gained 3.4% this year through May 15, compared with an 11.4% decline in the S&P 500. The Nuveen ESG fund is about 45% invested in the information technology sector.
But advocates say the tech-heavy ESG funds are meant to act as better alternatives to core index funds.
“Those are the companies that are not only doing well in the coronavirus environment, but probably coming out on the other end of this, are going to continue to do well,” Lydon said.
“And if those have high ESG scores, which they do, that does nothing but help improve the confidence of the average investor there,” he added.