This article is by Bloomberg Intelligence analysts Shaheen Contractor and Christopher Cain. It first appeared on the Bloomberg Terminal.
This is driven by ESG indexes' factor exposures which tend to tilt toward a mix of low volatility and high-quality stocks. Due to this, ESG indexes provide a buffer during downturns yet fail to keep pace when the market heats up, something that's been reinforced throughout this year.
Even though results are mixed since April, ESG saw a relative outperformance during the 1Q downturn, supported by the fact that quality has outperformed rival factors this year. ESG's mix of low-volatility, quality stocks, along with sector allocations, suggest room for longer-term outperformance.
Performance during COVID-19 downturn
Analysis of environmental, social and governance (ESG) ETFs during the sell-off for the week ended Feb. 28 reinforces our view that these indexes provide a buffer during downturns, as select ESG indexes outperformed their benchmarks. Only 8% of U.S. ESG ETFs saw outflows vs. 22% of all U.S. ETFs, suggesting ESG is seen as a long-term investment more than a trading strategy
