What is ESG, SRI, and impact investing, and how have ESG funds performed?

ESG, SRI, and impact investing may seem like last decade’s buzzwords, but they now have enough capital and data behind them for investors to pay attention to.

ESG stands for environmental, social, and (corporate) governance. ESG investors look for companies that lead in those areas in addition to strong financial returns.

Broadly speaking, ESG investors, socially responsible investors (SRI), and impact investors invest in companies that are both financial winners and leaders in protecting the environment, creating a more just society, and are role models of corporate governance – though their investment objectives differ slightly from each other.

2021 was a landmark year for ESG mutual funds and exchange-traded funds (ETFs). According to Morningstar, $70 billion flowed into ESG funds, up 35% from 2020, which was another record-setting year. In total, sustainable mutual funds and ESG ETFs held $2.7 trillion in 2021, per Morningstar.

In 2012, there were 104 ESG funds. By the end of 2021, there were 534 ESG funds.

There is also growing data that ESG funds outperformed market benchmarks during 2020 and 2021. Proponents of ESG investing claim that companies that proactively address environmental risks, bolster treatment of employees and local communities, and practice good corporate governance run businesses that are more resilient to financial risks posed by climate change and other issues, for example.

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