Last year, 66 of Morningstar’s 116 ESG indexes, or 57%, outperformed their non-ESG equivalents, a decline from a 75% outperformance in 2020, according to an analysis from Morningstar Indexes.
ESG indexes tend to be light on the carbon-intensive energy sector, but the best performing global equity sector in 2021 was energy because of surging oil prices, said Morningstar.
But the underperformance due to energy underweight was reversed by the technology sector, which represents a large portion of the market especially in the United States and performed well over 2021.
When compared over a five-year period ended last year, 88 of the 110 ESG indexes (80%) have outperformed their non-ESG peers.
“In Asia, ESG screens have been successful in delivering a competitive risk/return profile over the past five years. All of Morningstar’s Asia-focused sustainability indexes both outperformed their non-ESG equivalents and loss less during down markets from 2017-2021,” said Dan Lefkovitz, Morningstar Indexes strategist and author of the research based in Chicago.
“Sustainable investors should be encouraged to see that long-term ESG performance has been competitive and linked to lower risk.”
Apart from better performance, ESG-oriented assets also show better downside protection, according to the report.
Ninety-seven of the 110 (88%) Morningstar ESG indexes with five-year histories lost less than their broad market equivalents during down markets as measured by the downside capture ratio.
“Generally speaking, sector tilts, security selection, and other factors such as geographic allocation and yield-curve positioning all help explain ESG index performance,” said Morningstar in its report.
In Asia ex-Japan, the outperformance in 2021 was boosted by the technology and financial sectors, including stocks such as Taiwan Semiconductor Manufacturing, Hong Kong Exchanges and Clearing, Tencent, Hyundai Mobis and Infosys, according to the report.
While in Japan, stocks such as Sony, Daikin Industries, and Tokyo Electron provided a boost to Morningstar’s ESG indexes from 2017 to 2021.
An earlier report by Morningstar also showed electric vehicle and renewable energy sectors in China had recorded a year of “stellar performance”, with the CSI Electric Vehicles Index and the CSI New Energy Index gaining 44% and 48.3%, respectively.
