NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, April 16, 2018

By Tim Gray

Until recently, investors interested in emerging market funds had few ways of singling out companies with standout environmental, social and governance records.

That has begun to change over the last several years, as the popularity of investing with an eye to these issues has surged. There are now 10 mutual funds and exchange-traded funds that invest in stocks in emerging markets while making environmental, social and governance performance an explicit part of their mission, according to Morningstar.

And early evidence suggests that these feel-good funds have been able to outkick their conventional kin. In 2016, Chris Varco, a managing director at Cambridge Associates, an investment consultant, conducted a study comparing the returns of MSCI’s standard emerging markets index to what’s now known as its Emerging Markets E.S.G. Leaders Index. (The latter is made up of companies with higher scores for environmental, social and governance performance, as ranked by MSCI.)

For its first several years, the E.S.G. index outperformed its peer benchmark. Mr. Varco wanted to determine whether that was luck. He crunched the data and concluded that selecting companies based on nonfinancial factors had helped. Simply put, the E.S.G. index did better because the companies within it appeared, on average, to be better run. “There’s yet to be a year where the standard index did better,” he said.