"ESG Funds with Stronger Governance Deliver More Stable Returns"

An analysis has found that ESG funds within a portfolio that demonstrate strong governance performance tend to have lower downside risk, resulting in more stable investment outcomes.

According to investment advisory firm Sustinvest on September 25, an analysis of 56 domestic equity-type ESG funds in the first half of the year showed that their ESG performance scored 78.75 points, surpassing both the KOSPI (78.25 points) and non-ESG funds (77.76 points).

In particular, ESG funds with better governance (G) performance consistently exhibited lower downside deviation and higher risk-adjusted returns. Among the 46 domestic equity-type ESG funds in the first half, 32 funds recorded excess returns compared to the KOSPI.

Additionally, an analysis of exposure to norm-based screening stocks-those that exclude investments in socially controversial industries such as alcohol, tobacco, and gambling-found that the median exposure of domestic equity-type ESG funds was 0.50%. This is lower compared to the KOSPI (1.63%) and non-ESG funds (1.80%).

As of the end of June 2025, the total net assets of domestic ESG funds amounted to 9.3838 trillion won, representing an increase of approximately 37% compared to the second half of 2024. In the first half, net inflows reached 1.9161 trillion won, indicating that the significant inflow into domestic bond-type ESG funds observed in the second half of last year has continued.

In terms of returns, domestic equity active ESG funds outperformed both the KOSPI and non-ESG funds over the past 6 months, 1 year, and 3 years. Domestic bond active types also surpassed the performance of non-ESG funds over all periods.

In the first half of this year, domestic equity-type ESG funds recorded net outflows. This is attributed to some profit-taking and a concentration of funds into specific sector and theme funds. However, domestic equity-type ESG funds that saw net inflows during the same period were found to be those related to policies such as the new government's promotion of eco-friendly energy and expansion of shareholder returns.

Choi Bokyung, the lead researcher who authored the report, stated, "This analysis confirms that the governance performance of ESG funds translates into risk-adjusted performance," adding, "This offers important implications for the long-term stability of ESG investing."

Ryu Youngjae, CEO of Sustinvest, emphasized, "Since the launch of the new government, there has been a greater focus on improving corporate governance and strengthening the role of institutional investors." He added, "Beyond investing in companies with strong ESG performance, actively engaging in stewardship activities to address sustainability issues and enhance corporate value from a long-term perspective is key to advancing the maturity of the domestic ESG investment market."

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