Thanks to Tech Giants: ESG Funds Outperform in First Half of 2024!

July 26, 2024 - Environmental, social, and governance (ESG) funds faced significant headwinds in the first half of 2024, marked by political attacks and substantial outflows. However, despite these challenges, ESG funds demonstrated resilience, outperforming the broader market thanks largely to their heavy investments in technology stocks.

In the first quarter, ESG funds globally experienced one of their largest cash outflows, driven by a backlash against ESG investing in the United States. However, new data reveals that ESG funds performed strongly in the first six months of the year, buoyed by their significant holdings in tech giants like Nvidia, Microsoft, Amazon, Meta, and Apple.

The S&P 500 gained approximately 15% in the first half of the year, with nearly 60% of this gain attributable to these five technology companies. ESG funds, which typically underweight oil and gas stocks, benefited immensely from their tech-heavy portfolios. Vanguard’s FTSE Social Index fund, for instance, rose by 15.5% in the first half of the year, outpacing the S&P 500's 15% gain. Over the past 12 months, the fund saw a 26% increase, compared to the S&P 500's 24.9%.

The top performer among large ESG funds was the Putnam Sustainable Leaders fund, which saw a 19.4% increase in the first half of 2024. While technology stocks like Nvidia and Microsoft played a significant role, portfolio manager Katherine Collins emphasized that other sectors also contributed. Companies like Boston Scientific and Eli Lilly bolstered returns, showcasing the diverse potential within ESG investing.

Despite record outflows in the first quarter, ESG funds saw a reversal in trends during the second quarter, driven by European investors. Morningstar data indicates that while U.S. outflows slowed in April and May, European inflows increased, highlighting a regional divergence in ESG investment sentiment.

Hortense Bioy, head of sustainable investing research at Morningstar, noted that although sustainable funds saw outflows in April and May, the rate of outflows had significantly decreased. “Assets are up – they continue to go up because of market appreciation,” she said, indicating that total assets in sustainable funds now stand at approximately $336 billion.

Despite the political and market challenges, the long-term outlook for ESG funds remains optimistic. As climate change impacts become more tangible, investor interest in sustainable investing is expected to grow. Peter Krull of Earth Equity Advisors noted that the firm’s clients, who are often motivated by climate concerns, continue to show strong demand for ESG options.

In conclusion, while ESG funds faced significant challenges in the first half of 2024, their performance has underscored their resilience and potential for long-term growth. As the market continues to evolve, ESG funds are likely to remain a crucial part of the investment landscape, driven by both regulatory support and growing investor awareness of sustainability issues.