What are ESG Focused Funds? And Why are They Important to Ethical Investors?

ESG-focused funds are portfolios of bonds or equities for which environmental, social, and governance issues have been considered during investment. All bonds or equities in the fund have been tested to show how sustainable they are regarding environmental, social, and governance factors.

Therefore, an ESG investment should only contain those securities with a higher sustainability score, excluding the companies with poor labor relations, poor waste management, and pollution. In addition, research has shown that focusing on ESG in your securities selection can lead to a better-informed decision.

It also shows that sustainability funds can indeed perform better than those that are not sustainable. Over the recent years, ESG funds have gained popularity because many investors want to be seen making contributions towards the betterment of humankind without losing their financial returns.

Importance of ESG Funds to Ethical Investors

ESG Funds Reduce the Risk of Investment

Investors who choose to invest in ESG funds are trying to avoid companies whose practices are questionable to humankind due to their irresponsible practices. Unfortunately, unethical investments have a higher chance of failure, so if you buy stocks from them, you may end up selling them at a lower price, which is a poor investment strategy.

But ESG-focused companies have higher community support and are growing tremendously. Therefore, buying stocks from ESG investments is likely to sell at a higher price, making it a better investment strategy.

ESG funds can create diversity in your holdings and fill out your portfolio; the number of ESG funds has recently merged. According to the data released by Morningstar, in 2018, there were 303 exchange-traded and open-end funds, but that went down to 270 in the year 2019. In addition, some of these funds that focus on a specific issue merged, making it easy for investors to personalize their portfolios depending on the area they want to impact.

Also, if you use a screening tool for mutual funds, you will be able to see the rating of each ESG stack up. Therefore, diversifying your portfolio further helps investors spread the risks across various investments, enabling them to lower the chances of financial loss. Humankind investment funds also have a low expense ratio, which means that investors pay less for invested funds, further boosting their financial returns and increasing their chances of success.

ESG Funds Charge Lower Fees

On average, actively managed ESG funds have lower annual charges when compared to non-ESG funds. For example, Morningstar’s research comparing the cost of actively managed non-ESG and ESG funds shows that the annual charge was 1.39 percent for non-ESG funds and 1.1 percent for ESG funds. Also, ESG funds have been recently launched in the market, so they come with comparatively low costs to attract investors.

They Outperform, Especially During Down Markets

The outperformance of a fund is measured in terms of its relative performance, which shows that these funds have more gains than the loss when compared to a standard index. Humankind’s investments are considered better run from a governance perspective which may help its financial performance. Also, the funds that bear the ESG labels tend to outperform non-ESG funds in the long and medium terms.

Summary

ESG-focused funds are becoming beneficial and vital to ethical investors because of the investments’ positive contributions to humankind. The main benefits of investing in ESG-focused funds include the reduced risk of investment; since they are sustainable, the chances of failure are minimal.

The funds also have a lower annual operational cost; because they have recently entered the market and are cost-effective in attracting new investors. ESG funds outperform non-ESG funds when compared to standard indexes over the long term