Many clients ask how they can invest their money in a way that aligns with their values. As one might imagine, there isn’t a universal way to accomplish this because different people have different values. However, there are some basic criteria in the investment world to help investors better understand how their investments score from a sustainability perspective. The three main pillars that many publicly traded securities are scored are Environmental, Social, and corporate Governance (ESG). US SIF defines sustainable investing as “An investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.” (For a more in-depth blog that covers the basics of ESG, feel free to read this piece).

One of the first things that people interested in ESG investing ask is “will I be sacrificing my returns?”. There are numerous studies out there that show that you do not have to sacrifice returns by investing in ESG. As a matter of fact, some studies show that ESG can add some downside protection in a portfolio. Keep in mind that when comparing an ESG portfolio to a “traditional” portfolio you should ensure that asset allocation, among other factors, is consistent for an apples-to-apples comparison. 

Let’s take a look at how ESG funds performed in 2020, specifically US large-cap funds. This chart compares the total return of the Nuveen ESG Large-Cap ETF (ticker: NULC) vs. the Vanguard Large-Cap ETF (ticker: VV) in 2020.

This shows that the fund that incorporated ESG (NULC) returned 22.47% in calendar year 2020 while a peer that did not include ESG screening (VV) returned 20.98% in 2020. 

Now let’s look at two ETFs from the same fund manager: BlackRock. One of their flagship products, iShares ETFs, have ESG and non-ESG versions. The following chart compares two BlackRock large-cap blend funds: iShares ESG Aware MSCI USA ETF (ticker: ESGU) vs. iShares Russell 1000 ETF (IWB). 

This chart is another example of an ESG fund outperforming a peer (by 1.77% total return) in 2020. It is interesting to note that many of these funds end up owning a lot of the same companies under the hood. As a matter of fact, eight of the top 10 holdings in ESGU and IWB are the same. These are companies that we are probably familiar with: Apple, Microsoft, Amazon, Google, Facebook, Tesla, and Johnson & Johnson. 

The previous two charts show examples of where US large-cap ESG funds showed superior performance in a single year, 2020. Let’s take a look back a few years. The chart below goes back to 2017 and uses a couple of the iShares ETFs that were discussed in the last chart and compares them to a second ESG fund, FlexShares STOXX US ESG Impact ETF (ticker: ESG).

Over this time period, ESG again outperformed. In this case, FlexShares ESG ETF provided a 96.68% total return, significantly higher than either of the iShares ETFs.

The primary takeaway from the last three charts is that in recent history, incorporating ESG has appeared to be favorable to investors. One reason is that the price of oil is down, and one of the first screens applied to ESG funds is to “get rid of big-oil, carbon-intensive companies.” But oil isn’t the only reason; that only addresses a single screen within the Environmental category. Don’t forget about the ‘S’ and ‘G’ of ESG. 2020 – the year of COVID, social unrest, and political division – is an example of when ESG factors have shown to outperform during a period of uncertainty. Of course, as investors, we know that ESG may not always outperform. But from a macro perspective, we are seeing a trend in the number of assets that are going into ESG funds. 


The prior section took a look at ESG funds and their performance in very recent memory. This section will zoom out a bit and look at ESG trends over a longer period of time as well as the growth in the amount of ESG offerings and the inflows going into ESG funds. 

According to US SIF’s 2020 Report on US Sustainable and Impact Investing Trends, of the $51.4 trillion professionally managed assets in the US, $17.1 trillion (33.3%) are considered sustainable investment assets. Compare this to US SIF’s (then known as the Social Investment Forum) 2010 report where an estimated $3.07 trillion of the $25.2 trillion (12.2%) of professionally managed assets included sustainability criteria. Graphically, it is easy to see the growth of ESG over the last couple of decades.

ESG IN 2021

Investors have been taking note of ESG trends for many years now, and the “big dog” asset managers are not taking ESG and sustainability lightly. In the executive summary of the 2021 Long-Term Capital Market Assumptions report, JP Morgan states, “Whether climate change is tackled through less intensive usage of “brown” energy or greater investment in green energy, we see a positive economic outcome in aggregate from more sustainable investment…Clearly, there will be winners and losers, particularly as demand for fossil fuels levels off and eventually goes into reverse. But as with other long-term challenges, we expect that the adoption of sustainable technology will both lead to new innovation and increase efficiency.” BlackRock’s 2021 Global Outlook is much more to the point, stating “We prefer sustainable assets amid a growing societal preference for sustainability.”

ESG has become quite controversial within the world of employer-sponsored retirement plans. Many employees of companies that offer defined-contribution plans such as 401(k)s are asking for more sustainable investment options within the investment lineup of their plan. That’s especially the case as Millennials are accumulating more wealth and Gen Z is continuing to enter the workforce and participate in their employer’s 401(k) plan. However, the stance of the Department of Labor (DOL), is that they do not want ESG funds within a 401(k) investment lineup. They don’t explicitly ban an ESG-labeled fund from a 401(k), but a couple of press release comments make it clear where they stand:

“Plan fiduciaries should never sacrifice participants’ interests in their benefits to promote other non-financial goals.” – Acting Assistant Secretary of Labor for the Employee Benefits Security Administration Jeanne Klinefelter Wilson

“This rule will ensure that retirement plan fiduciaries are focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives.” – U.S. Secretary of Labor Eugene Scalia

I doubt that we will see any major overhaul to investment lineups in 2021 by 401(k) plan fiduciaries due to the position that the DOL has taken. That said, if more and more employees continue to push for ESG options within their retirement plans, this could change over time.

If, over time, ESG proves to add shareholder and stakeholder value, there very well may be a convergence between ESG and “traditional” investing. In other words, analyzing ESG factors may simply be part of every money manager’s investment process. 

Mitch DeWitt, CFP®, MBA


This piece was part of Walkner Condon’s 2020 Review & 2021 Investment Outlook Guide, a comprehensive interactive PDF covering a wide range of subjects and trends, including the S&P 500, electric cars, and more. To read the full guide, please click the button below.