ESG investing – is there a return sacrifice?

Do I have to give up returns in exchange for responsible investing? If this is one of the firsts questions that comes to your mind regarding ESG investing, you are not alone. Fortunately, being an ESG investor doesn’t necessarily mean that you have to sacrifice your returns. 

Our research shows that returns generated by the largest and highest rated ESG ETFs surpass that of regular ETFs. According to BrokerChooser calculations, the 10 largest US-domi0ciled ESG ETFs with AAA ratings had an average return of 16.05% on a 3-year horizon.That compares with an average return of 14.53% for the 10 largest non-ESG ETFs issued in the US. 

In the words of John Hale, Morningstar’s director of ESG research for the Americas, academic research suggests “no systematic performance penalty associated with sustainable investing and possible avenues for outperformance through reduced risk or added alpha.” Researchers at MSCI found that strong ESG characteristics have led to positive stock performance. Firms with high ESG ratings tend to be more competitive, are better at managing company-specific risks and have lower exposure to systematic risk factors. 

Even though the picture is promising on the returns front, ESG investors typically face higher fees and costs. Average annual costs paid by investors for holding positions in the 10 largest ESG ETFs amounted to 0.54%, which far exceeds the 0.04% annual cost level for non-ESG ETFs.

Another fact worth bearing in mind is that ESG investments, just like any other investment, can be volatile. An ESG investment may outperform or underperform the market at times, similarly to any investment strategy that aims to achieve greater objectives than just tracking a broad market index. 

A final word of advice. Make sure your investment is aligned not only with your values, but your financial goals, too. And always do your risk analysis.

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