There has been tremendous volatility in the price of most asset classes since the onset of the coronavirus-related financial crisis.  That includes the price of sustainable equity funds.  Given that much of the growth of sustainable investing has taken place in the past five years, many environmental, social, and governance (ESG) strategies have experienced relatively few periods of market volatility.  What can we expect in terms of the performance of ESG funds in this period of extreme volatility?

The Benefits of ESG Discipline in Times of Market Volatility

In theory, the performance of ESG funds should hold up well in times of market volatility.  At the company level, the managers of a sustainable business will likely have given plenty of thought to contingencies.  They will focus on risk issues and make business continuity plans.  While even the best-governed companies likely wouldn’t have prepared sufficiently for a pandemic of this scale, they are still in a relatively strong position to act decisively given their strong leadership.

Risk management is an important factor at the portfolio level, and here too ESG provides an edge.  When the CFA Institute conducted a survey[1] of portfolio managers and asked, “why do you take ESG issues into consideration in your investment analysis/decisions?” the vast majority replied, “to help manage investment risks.”

In addition, many ESG funds completely avoid or limit their exposure to fossil fuels and other industries heavily reliant on oil and gas (e.g., airlines and cruise ships), which has insulated them from the recent volatility associated with the collapse in the price of oil.

ESG and Market Volatility: Some Studies

There have been several studies of the performance of ESG funds in times of market volatility.

  • An April 3, 2020 analysis[2] by Morningstar entitled “Sustainable Funds Weather the First Quarter Better Than Conventional Funds” found that 24 of 26 ESG-tilted index funds outperformed their closest conventional counterparts. The author of that analysis, Jon Hale, head of sustainability research for Morningstar, was quoted as saying[3] “it’s not like a massive outperformance, but it’s consistently better than average… that’s a great sign that ESG investing is not just some kind of bull market phenomenon, and it’s more and more of an all-weather type of approach.” 
  • A March 13, 2020 analysis[4] by Bloomberg revealed that, in the current volatility, the average ESG fund declined less than the S&P 500 and, also, that older ESG funds have been outperforming newer ESG funds in the current volatility. The fact that ESG investment funds with longer track records are outperforming their newer rivals suggests that managers at older ESG funds have more experience investing through an ESG lens than do the newcomers, and so are able to execute more effectively.
  • In 2018, Arabesque, an asset management and research firm that focuses on ESG issues, did an analysis[5] of all U.S. stocks using data going back to 2007. It found that stocks that finished in the top quintile based on their ESG metrics outperformed those in the bottom quintile in the four worst years for the stock market in that period: the financial-crisis years of 2007-08, as well as 2011, and 2015.  The margin ranged from 1.8 percentage points in 2007 13.5 points in 2008.
  • A 2016 academic study[6] concluded that, during the 2008 financial crisis, firms with high social capital, measured as corporate social responsibility (CSR) intensity, had stock returns that were four to seven percentage points higher than firms with low social capital. The authors observed “this evidence suggests that the trust between the firm and both its stakeholders and investors…pays off when the overall level of trust in corporations and markets suffers a negative shock.”


The evidence strongly suggests that ESG funds are performing relatively well during the current period of market volatility, and this is consistent with their performance in prior periods of volatility. As Cornerstone’s CEO Erika Karp notes, “In the final analysis, when considering ESG factors, ‘Governance’ is first among equals.  It is a proxy for quality, a proxy for innovation, and a proxy for resilience. In times of volatility, when there is a vacuum of information, those companies that consistently embrace their principles, their workforces, and their unique competitive advantages will outperform.”