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ESG Investment Returns Starting to Outperform Other Mutual Funds, ETFs

[ESG] can be a pretty wide definition. If focusing on one of these [categories], are we getting the returns that the clients want?

Reik Read, Asset Management Director, Baird Equity

Investors' growing appetite for sustainable investment vehicles is paying off, even as lingering doubts about the strategies persist for regulators and some asset managers.

Since their introduction more than a decade ago, environmental, social and governance-focused investment products have now begun recording returns on par with or better than funds built purely for risk-weighted performance, a trend that runs counter to the notion that taking ESG into account means leaving money on the table.

Those performance-tied concerns were underscored by the U.S. Department of Labor in April when the agency warned investment advisers working on certain retirement plans that they "must not too readily" place ESG factors above economic returns, given their obligations to act in their clients' best interests. As a result, certain asset managers have grown worried that by creating ESG-focused investment strategies, they could be setting themselves on a collision course with regulators.

First designed for individual investors looking to craft portfolios around their personal beliefs, sustainable investing has blossomed into a $22.8 trillion global industry with 84% of asset owners around the world currently weighing or already pursuing sustainable investments, according to a recent report from the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Investment Management Inc.

Returns from ESG-focused exchange-traded funds and mutual funds have also swelled, overtaking broader funds' median returns.