Is there a performance disadvantage to ESG investing?

[Riverwater Partners’] highly integrative process can enable our clients to invest according to their values while also opening up the possibility of not only no performance disadvantage but, as is our goal over the long term, a performance advantage.

For many years, the primary approach taken by “responsible” investors was to screen out certain types of holdings, such as tobacco and weapons firms.

Investors in these strategies were implicitly willing to risk missing out on potential gains when companies in excluded categories performed well.

However, historical data has generally shown that screening out a relatively small proportion of a total investment universe is likely to have little to no effect on long-term performance.

So, in today’s “ESG integration,” to the extent negative screens are used, we believe they are unlikely to “cost” investors at all. But there’s a newer, vital dimension as well: applying ESG analysis to help inform investment decisions about what to own, not just what not to own.

Perhaps one of the best historical snapshot views of ESG performance over time comes by way of the MSCI KLD Social 400 Index. This index is particularly valuable for historical purposes because it dates back to 1990.

The following chart demonstrates the outperformance of the MSCI KLD Social 400 Index vs. the broad-based S&P 500 Index over nearly 30 years. Not only is there no performance disadvantage, there is actually a performance advantage achieved by the social index.


ESG Growth Chart vs. S&P 500 Index