'ESG' Stumbled by Inflation

[Asia Economy Reporter Junho Hwang] Inflation has shackled the returns of ESG (Environmental, Social Responsibility, Governance) exchange-traded funds (ETFs). ESG seemed to be entering a full bloom phase last year as the importance of responding to climate change was highlighted, leading to increased capital inflows into companies moving away from fossil fuel use. However, since most of the investment stocks are concentrated in IT and other technology sectors, they have been directly hit by inflation.

According to the Korea Exchange on the 27th, the returns of domestically listed ESG ETFs have recorded negative figures from the beginning of the year until the 26th. For example, the ‘ARIRANG ESG Excellent Companies’ ETF fell by about 3.87%, but products like ‘TIGER MSCI KOREA ESG Leaders’ dropped by approximately 16.23%. According to financial information provider FnGuide, the overall domestic equity ETFs returned -11.48%, while ESG equity funds fell by 12.50%, indicating that ESG ETFs performed worse.

This trend is even more pronounced in the global market. While global equity ETFs declined by 8.56% over the past year, global ESG equity ETFs plunged by 11.29%. The ‘SOL US S&P500 ESG’ ETF, listed on the domestic market but investing in ESG companies within the US S&P index, saw its returns fall to -11.41%.

The poor performance of ESG returns stems from the inherent characteristics of ESG. ESG products commonly use a negative screening strategy with a core principle of moving away from coal and fossil fuels to calculate their indices. This means excluding companies that produce fossil fuels such as coal for power generation or generate profits from them when selecting investment targets. Consequently, traditional energy industry stocks are excluded from the portfolio. For example, the ‘KOSPI 200 ESG Index,’ used as the base index for domestic ESG ETFs, includes stocks selected based on ESG evaluations by the Korea Corporate Governance Service, such as Samsung Electronics, SK Hynix, and NAVER. The ‘WISE ESGM Responsible Investment Index,’ which selects stocks based on ESG Moneta’s corporate evaluations, includes Samsung Electronics, Kia, and Hyundai Mobis. The global market is similar; representative ESG indices such as the DJS Index and MSCI USA EXTENDED ESG FOCUS GR USD Index mainly include Microsoft, Alphabet, Amazon, and Apple.

FnGuide’s Quantitative Research Division analyzed, "The major stocks included in ETFs are technology stocks," adding, "Their stock prices have been weak recently due to geopolitical instability causing raw material price increases, strong inflation, and normalization of monetary policies in various countries, which also affects ESG ETF returns."

However, Kwangyoung Oh, a researcher at Shin Young Securities, stated, "With the sharp rise in raw material prices, challenges and opportunities for eco-friendly energy will arise, which will impact ESG investments," and added, "In the second half of this year, ESG is expected to grow further as it expands into areas such as biodiversity."

Meanwhile, amid this atmosphere, an anti-ESG ETF (ORFN) was launched in the US on the 17th. This ETF includes stocks marginalized by ESG, such as petrochemicals, nuclear power, defense industry, alcoholic beverages, tobacco, and casinos, and has shown a slight upward trend since its launch.

This content was produced with the assistance of AI translation services.