There’s a specific point about ESG that many advisors and market participants frequently ponder. It’s about whether this investing style can generate returns on par with or in excess of traditional strategies. There have been ample amounts of political criticism aimed at ESG in recent years. But myriad data and research support the notion that it does reward long-term investors with strong returns.
Take the case of the Invesco ESG Nasdaq 100 ETF (QQMG). It follows the ESG derivative of the Nasdaq-100 Index (NDX). Over the past 12 months, the ETF has beaten non-ESG NDX-tracking ETFs as well as the S&P 500.
Some of QQMG’s outperformance of non-ESG benchmarks is attributable to the ETF’s significant growth stock tilt and a 61.13% allocation to technology stocks. However, it can’t be overlooked that if QQMG components didn’t meet various ESG standards, those stocks wouldn’t qualify for admission into the fund. That is to say in the case of QQMG, the ESG overlay is in fact serving as a return enhancer.
Pros Prioritizing ESG Analysis
In what could be pertinent to advisors and retail investors considering products such as QQMG, data indicates professional asset allocators are increasingly ESG-screening as part of their due diligence process.
“Investors are increasingly factoring in ESG metrics into their investment decisions. 9 in 10 asset managers believe that integrating ESG analysis into their investment strategy will improve long-term returns. And a majority of institutional investors have reported that their ESG products have outperformed traditional counterparts,” according to J.P. Morgan Private Bank.
There are other compelling reasons for investors to consider approaches such as QQMG. As J.P. Morgan observed, companies with strong ESG scores tend to outperform rivals that are ESG laggards. Knowing that the outperformance is possible is obviously good news. But knowing how it’s accrued is valuable in its own right.
“Importantly, ESG leaders will be forward-thinking in their capital allocations as they look to manage market, regulatory, reputational and physical risks and build sustainable businesses with a focus on the long term. The bottom line is that ESG leaders tend to be more profitable and generate above-average returns, providing opportunities for more cash to be returned to shareholders over time. As seen in the performance chart, companies with higher ESG ratings outperformed those with lower ESG ratings,” added J.P. Morgan.
Bottom line: ESG leaders are often profitable and above-average stewards of shareholder capital. Those are contributing factors to the style’s attractive long-term potential.
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