ESG investing performed in 2020

Despite the many challenges wrought by 2020, last year was without a doubt another strong year for ESG-oriented strategies. Returns for ESG oriented strategies in most asset classes were exceptionally strong and, in many cases, outperformed their respective benchmarks. Product choice also continued to expand as more asset managers launched more products across a growing set of asset classes. With increased competition has of course come lower fees and a growing set of product enhancements. And, finally, most exciting in our view, is a continuing trend that Mercer Advisors has long been at the forefront of—cutting edge innovation with respect to portfolio management and customization.

The facts about ESGs

ESG solutions are assessed using the same considerations we use for all investments. Returns, risks, diversification, and costs are all important considerations in any investment, and ESG solutions are no exception.

• Returns: Let’s not forget that ESG investing is still investing—it’s not charity. Returns matter. In 2020, our recommended ESG strategies delivered strong returns across the board. In fact, many of our recommended solutions outperformed their respective benchmarks in 2020 (see below summary). For example, consider DFA’s US Sustainability Core 1 fund (DFSIX), the flagship US equity fund in our popular ESG mutual fund portfolios. The fund returned 22.54% in 2020 versus the Russell 3000 (the fund’s benchmark). Similarly, PMC’s QP Impact ESG Large Cap Portfolio, our most popular ESG-focused individual stock strategy (a separately managed account otherwise referred to as a “SMA”), returned 22.25% versus 18.40% the S&P 500 Index. 

• Risk: There is no systematic evidence that ESG-specific portfolios contain more or less risk than non-ESG strategies, a claim made by some on the premise that ESG strategies are often slightly less diversified than non-ESG ones. For example, consider again DFA’s US Sustainability Core 1 fund (DFSIX). The fund has 2,060 individual holdings and a trailing 3- year standard deviation (risk) of 22.37% versus 21.35% for the Russell 3000¹-a statistically insignificant difference.Similarly, consider again PMC’s QP Impact ESG Large Cap Core Portfolio, a fully customizable strategy that owns 131 US large cap stocks. Despite holding fewer companies than the Russell 1000, the strategy has a 3-year risk (standard deviation) of 19.07% versus 19.37% for the index.  Subsequently, in practice we see little real-world evidence that ESG strategies are any more volatile than non-ESG strategies.

• Genuine ESG exposure: Given the strong returns of many ESG strategies relative to their benchmarks, one might wonder whether such strategies are genuinely delivering on their ESG-related promises to investors. Consider again DFA’s US Sustainability Core 1 fund (DFSIX). According to Morningstar, the fund’s portfolio companies have a weighted carbon score of 5.71 vs 7.13 (lower is better) and its fossil fuel involvement is only 1.09% versus 6.53% relative to its peer group. Similarly, PMC’s QP Impact ESG Large Cap Core Portfolio has 38% less exposure to high risk ESG companies than the benchmark and owns no companies engaged in the sale of adult entertainment, alcohol, firearms, tobacco, nuclear power, or military weapons—whereas the Russell 1000 Index owns 58 such companies.²

• Portfolio customization—at no additional cost: At Mercer Advisors, we partner with clients to build truly customized portfolios that are fully aligned with their values. We continue to be at the forefront of bringing best-in-class, customized investment solutions to clients. Last year was no exception. Our entire line of equity SMAs are now fully customizable along any number of dimensions. For example, clients may select from up to 20 different ESG screens when tailoring their portfolios to their values. We can also exclude certain companies or even entire industries or sectors from portfolios—and at no additional cost. After all, it’s your wealth and it’s our view that it shouldn’t cost more to simply align your portfolio with your values.

ESG solutions offer additional choices for clients

We understand ESG investing isn’t for everyone; we all have our own preferences. Our ESG offering is about providing clients more choices when customizing their portfolios. We offer the ability to do so with best-in-class, low-cost mutual funds, ETFs, or individual securities. We also have an unrivaled set of technological capabilities whereby we can easily screen out specific companies or even entire industries or sectors. But let’s not forget that ESG investing is, after all, still about investing. As with all investing, risk, returns, and fees are critically important. You can be confident that all of us at Mercer Advisors will continue to diligently monitor and manage all three on your behalf.

Mercer Advisors recommended ESG solutions³

Footnotes:

¹Source: YCharts, Inc.; Fund Prospectus for DFSIX.
²Source: Portfolio Management Consultants (PMC)
³Sources: FactSet, Inc.; Morningstar, Inc. “Expense” refers to the underlying mutual fund, ETF, or SMA net expense ratio or, in the case of SMAs, the maximum manager fee.  “Expense” does not include Mercer Advisors advisory fees.