Wall Street Math Shows ESG Funds Can Ride the Value Stock Boom

Green funds have gained a reputation of benefiting from the tech rally during the pandemic. As the economy recovers and investors shift to cheaper stocks, those products might still be able to thrive.

Relative to the S&P 500, funds that track companies that meet environmental, social and governance standards have more exposure to cyclical sectors than the broader industry, according to a Bank of America analysis. Those U.S.-domiciled ESG products are overweight industrial, raw-material and real-estate shares, while mutual funds in general are underweight those groups.

“One of the key pushbacks we often get from investors is that ESG benchmarks have outperformed because they are overweight tech and growth stocks,” said Marisa Sullivan, head of U.S. ESG research for Bank of America Global Research. “We found they are overweight a lot of cyclical sectors, so maybe they aren’t as poorly positioned for a value rotation.”

ESG funds have avoided the growth-oriented consumer services sector, according to the study, and have raised their exposures to energy and utilities in recent months -- although they are still underweight those industries.

“There’s a little bit of a misconception that everything ESG-oriented has to be growth or tech heavy,” said Omar Aguilar, chief investment officer of passive equity and multi-asset strategies for Charles Schwab Investment Management. “The evolution of these ESG strategies is still in flux, and the makeup of these ESG strategies will be a key part of how they evolve this year.”