Domestic stock-based ESG funds, leading in both returns and stability

Domestic stock-based ESG funds have outperformed non-ESG funds in returns over the past 6 months, 1 year, and 3 years. Analysis suggests that this investment approach, which comprehensively considers corporate environmental, social, and governance structures, demonstrates certain competitiveness in terms of profitability and stability.

According to an analysis released on the 7th by the ESG evaluation and investment consulting firm Sustinvest, as of the end of last year, domestically managed active stock-based ESG funds outperformed non-ESG funds across all performance intervals. ESG funds refer to products that meet the ESG fund disclosure standards proposed by the Financial Supervisory Service in October 2023. There are 188 domestically managed stock-based ESG funds in total, and this analysis focuses on 55 of them.

In terms of returns, the 6-month return of domestically managed active stock-based ESG funds was 37.22%, which is 2.14 percentage points higher than the 35.08% return of non-ESG funds. For the 1-year return, ESG funds were 83.20%, while non-ESG funds were 77.00%. For the 3-year return, the figures were 112.26% and 107.18%, respectively. Sustinvest noted that in the second half of last year, large-cap blue-chip stocks led the rally in the domestic stock market. The analysis indicated that, comparatively, ESG funds with a higher proportion of large-cap blue-chip stocks were in a more favorable market position than non-ESG funds that held a broader mix of small- and mid-cap stocks.

Not only in performance, but also in stability metrics, ESG funds showed relatively better results. The ESG score of domestically managed stock-based ESG funds averaged 77.51 points, higher than the overall KOSPI average of 77.21 points and the 76.27 points of non-ESG funds. In particular, ESG scores and governance structure scores show a significant negative correlation with downside risk, meaning that the better the ESG performance, the lower the likelihood—over the long term—of large stock price fluctuations. In other words, this can be interpreted as being meaningful not only for the concept of investing in “good companies,” but also for risk management.

However, the direction of fund flows and returns is somewhat different. As of the end of last year, net assets in the domestic ESG fund market amounted to 9.603 trillion Korean won, up 2.3% from 9.3838 trillion Korean won in the first half, but overall there was a net outflow of 8516 billion Korean won in the second half. Domestic bond-based ESG funds saw outflows of 6823 billion Korean won, while overseas equity-type and overseas bond-type funds experienced inflows. This is interpreted as investors showing a trend toward diversifying into overseas assets rather than limiting investments to the domestic market, as well as the result of adjusting bond product allocations according to changes in interest rates and economic outlooks. This trend suggests that the effectiveness of ESG investing itself is likely to remain, but capital may flow more selectively in response to domestic and international market conditions and the relative attractiveness of different asset categories.