Review and Outlook: Analyzing ESG and Sustainable Investing into 2021

Review and Outlook: Analyzing ESG and Sustainable Investing into 2021

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.

Webinar: ESG and Sustainable Investing – Aligning Your Values with Your Investments

Webinar: ESG and Sustainable Investing – Aligning Your Values with Your Investments

With the twists and turns of 2020 – horrendous wildfires, the onset on COVID-19, and social unrest – social consciousness has continued to extend into nearly all facets of our everyday lives. And whether you’ve heard the term ‘ESG’ or not, chances are you’ve thought about how your social consciousness and personal values intersect with your investment strategies.

Walkner Condon Financial Advisors’ Mitch DeWitt, MBA, CFP®, is joined by Senior ESG Fixed Income Research Analyst Lisa Fillingame Abraham of Brown Advisory to dive into this topic of Sustainable Investing. Along with an introduction to sustainable investing and what it means to be an ‘ESG’ or ‘Sustainable’ fund, the webinar explores trends from 2020, including the pandemic response and climate change, and outlook to 2021 and beyond.

Mitch DeWitt, CFP®, MBA

If you have any questions or would like to discuss anything from the Sustainable Investing webinar more in-depth, please feel free to reach out to me by tapping the button below. You can also schedule an appointment by clicking here.

Seven Things to Know About ESG and its Role in “Sustainable” Investing

Seven Things to Know About ESG and its Role in “Sustainable” Investing

What is ESG? 

ESG stands for Environmental, Social, and corporate Governance. They represent three categories that are commonly analyzed when looking to invest in a company or a fund. One common phrase that might sound familiar is “aligning your investments with your values.” Many financial advisors and institutions use that phrase to lead into a discussion around an investment portfolio that has incorporated ESG factors. More recently, ESG has been viewed as a material risk factor. Ultimately, this means that regardless of whether the portfolio aligns with your values or not, incorporating ESG may mitigate certain risks within your portfolio. ESG isn’t just for “tree huggers”; it is becoming more and more mainstream as people are looking to utilize it to make a more robust portfolio. 

What is included in ESG?

ESG includes dozens of criteria that fall under the three main categories. Common examples within the Environmental category are climate change vulnerability, emissions & energy use, and raw materials & other resource use. Common examples within the Social category are human capital management & labor practices, employee health & safety, and diversity & inclusion. Common examples within the corporate Governance category are board compensation & structure, executive compensation, and business ethics.

Is there a rating or scoring system to determine how “sustainable” a particular fund is?

Yes. Third party rating providers include MSCI, Sustainalytics (acquired by Morningstar), Just Capital, Arabesque S-Ray, ISS, S&P Global, and more. Most of these services require paid subscriptions if you really want to dive into the weeds and compare several companies side-by-side and their respective product involvements related to animal testing, for example. One of the easiest ways to get a quick 30,000-foot view is to reference the Morningstar Sustainability Rating of a company or a fund. Historically, Morningstar is known for their 5-star rating system, which is focused on financial performance. Their Sustainability Rating system is based on a 5-globe scale instead. A 5-star fund indicates that it has outperformed its peers from a financial return perspective; a 5-globe fund indicates it has outperformed its peers from sustainability perspective when it is scored using ESG criteria. Usually a company or fund will receive a score for E, a score for S, and a score for G, and then a blended overall sustainability score. You also may be able to get some ESG information from your financial advisor.  

How can I research or explore socially responsible funds? 

There are many ways to research Environmental, Social, and corporate Governance funds. You can do it by yourself or have a financial advisor knowledgeable about this space help you out. A common way to start is to set a screen to only include ESG funds. For example, let’s say you are looking to invest in a US Large Cap fund. Many brokerages have screeners that allow you to filter out the funds that do not incorporate ESG. At this point, you might have a list of funds that simply have “ESG” in the name of the fund. Just because a fund has ESG in the title doesn’t mean that the fund has the same criteria that you are looking for. Not all ESG funds are the same! A deeper dive can be more tricky. In the case of a fund, you may want to see how the fund scores in the E, S, and G categories as well as an overall sustainability score (see section above). You can also look at the latest holdings report to see what companies the fund owns. This will help you gauge if the fund owns the companies that you want (or don’t want) to invest in. You can also read through the investment objective and prospectus of a fund to get additional information. A statement might be as simple as “The Fund employs a passive management (or “indexing”) approach, investing primarily in large-capitalization U.S. equity securities that exhibit overall growth style characteristics and that satisfy certain environmental, social and governance (“ESG”) criteria.” The previous statement described was directly from one of Nuveen’s ESG Exchange Traded Funds (ticker: NULG).

What has contributed to the rise in popularity of ESG?

ESG has become more popular due to changing investor preferences, generational differences, and published studies which show that returns do not need to be sacrificed by incorporating it into a portfolio (some studies even show outperformance in bull markets and increased downside protection in bear markets). Investors are demanding more from their investments, not just in financial return, but in their societal impact. Generally younger investors (e.g. Millennials, Gen Z) are applying a more scrutinous lens to their investment portfolios compared to older investors (e.g. Baby Boomers). There are also gender differences: women generally have more interest in ESG than men. Fund companies and money managers are listening. They are incorporating ESG criteria into their investment process not only because investors are asking for it, but also because they believe incorporating ESG into a portfolio can help manage risks.

What is the difference between Sustainability and ESG?

ESG generally falls under the umbrella of sustainable investing. US SIF describes it well: “A key strategy of sustainable and responsible investing is incorporating ESG criteria into investment analysis and portfolio construction across a range of asset classes.” One way to think of it is companies that have high ESG scores are more sustainable, resilient, and therefore (theoretically) will be able to generate superior earnings over time. Of course, superior earnings over time would be reflected by positive portfolio performance.

Can a “big oil” company be included in one of these funds?

Yes. Remember when I mentioned that not all ESG funds are the same? Some funds have a “higher bar” than others. Or some simply have a different approach to inclusion within their fund. For example, one fund, Nuveen’s ESG Large Cap Value ETF (ticker: NULV), includes oilfield services company Baker Hughes and the energy company Valero. It does not include companies like Exxon and Chevron, which are part of the S&P 500 Value Index. Another fund, BlackRock’s iShares ESG Aware MSCI USA ETF (ticker: ESGU), not only includes Baker Hughes and Valero, but in addition it also owns Exxon, Chevron, ConocoPhillips, and Marathon! Why is this the case? For the most part these funds start with the same “basket of goods.” In other words, U.S. publicly traded companies. But their processes are different. Nuveen excludes a wave of companies that do not live up to a set of predetermined ESG criteria, then selects the “best-in-class” ESG leaders in their respective sector, and then applies a carbon emissions/intensity screen. When it is all said and done, NULV has less “big oil” companies in their portfolio. BlackRock applies business involvement screens to their ESG Aware funds. The five screens they outline are civilian firearms, controversial weapons, oil sands, thermal coal, and tobacco (see definitions here). After applying their screens they still include the aforementioned companies in the fund. Again, not all ESG funds are the same.

Mitch DeWitt, CFP®, MBA

Investment Guide: Reviewing 2020 and Financial Outlook for 2021

Investment Guide: Reviewing 2020 and Financial Outlook for 2021


With all of our advisors contributing content, this is Walkner Condon Financial Advisors’ first-ever comprehensive investment guide. The guide covers a wide-range of topics – from electric cars to the S&P 500 to sustainable investing, as well as some trends we see in the markets in 2021. The COVID-19 pandemic has affected nearly all aspects of our lives, and that thematic undercurrent runs throughout the course of this guide, both in the review of 2020 and the year that lies ahead.