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Markets in May post modestly higher total returns but ESG indices lag

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The Bottom Line: S&P 500 took a breather in May, adding 70 bps after registering three-strong successive monthly gains while ESG indices, in general, lagged.

S&P 500 added 70 bps in May following three-strong successive monthly gains while ESG indices, in general, lagged

The gradual reopening of many economies on the heels of the ongoing vaccine rollout and continued fiscal and monetary stimulus led to strong economic growth, particularly in the US and UK. At the same time, concerns about inflation that could force central banks to reverse course buffered the markets but in the end the S&P 500 recovered after dropping as much as 2.83% by May 12th. Refer to Chart 1. After registering three successive monthly gains ranging between 2.76% to 5.34%, the S&P 500 Index took a breather in May and added just 70 bps. The Nasdaq Composite recorded a decline of -1.44%. Value stocks outperformed growth while small caps turned in mixed results across index providers. Foreign markets delivered more robust returns, with the MSCI ACWI ex USA adding 3.13% while MSCI EAFE gained 3.26%. Short-dated treasuries ranged between 1 bps and 2 bps during the month while 10-year Treasuries declined by 7 bps to end May at 1.58%. Against this rate backdrop, the Bloomberg Barclays US Aggregate Bond Index posted a gain of 33 bps, the second consecutive gain after recoding declines during each of the previous there months. In general, ESG indices, tracking both securities as well as mutual funds, lagged their non-ESG counterparts.

Chart 1: S&P 500 cumulative price performance May 2021
S&P 500 cumulative price
Source: Yahoo finance/S&P Global.

Sustainable (SUSTAIN) fund equity indices lag in May while bond fund index outperformed for 14th consecutive month

  • Registering the smallest monthly increase since the end of January, the Sustainable (SUSTAIN) Large Cap Equity Fund Index added 0.21% in May but lagged the S&P 500 Index by 50 bps. The conventional index posted a gain of 0.70% which only five of the ten sustainable funds that comprise the SUSTAIN equity fund index were able to match or exceed. The best performing constituent fund in May was the Pioneer Fund A, up 1.93%, while the worst performing fund was the Eventide Gilead Fund I, ending the month at -2.57%. While the SUSTAIN equity fund index also lags the S&P 500 along intervals up to one-year, it excels for the trailing 3-years 18.5% versus 18.0%, calculated on an average annual basis. Refer to Chart 2.
  • The Sustainable (SUSTAIN) Bond Fund Index eked out a 4 bps advantage relative to the Bloomberg Barclays US Aggregate Bond Index, posting a gain of 0.36% versus 0.33%, and recording its 14th consecutive month of outperformance. Six constituent funds contributed to the benchmark’s outperformance with returns that ranged from 0.37% to 0.46%. The best performing fund in May was the Morgan Stanley Institutional Core Plus Fixed Income Institutional Fund that added 0.46% while the BlackRock Total Return Institutional fund brought up the rear with a return of 0.24%. The SUSTAIN Bond Fund Index is ahead over the three year trailing period 5.6% versus 5.1%. Refer to Chart 3.
  • The Sustainable (SUSTAIN) Foreign Fund Index gained 2.92% in May, but that fell short of the 3.13% posted by the MSCI ACWI ex US (Net) Index. Still, the SUSTAIN fund index remains ahead for the trailing 3 and twelve month intervals. Six of the ten constituent funds trailed the conventional index while the remaining four funds generated returns ranging from 3.36% to 3.95%, with the best total return delivered by GMO International Equity Allocation Fund III. At the other end of the range was the Federated Hermes International Equity Fund IS with a total return of 1.91%. Refer to Chart 4.
Chart 2: SUSTAIN Large Cap Equity Fund Index Performance Results: June 2020 – May 2021
SUSTAIN Large Cap Equity Fund Index Performance
Notes of Explanation: Fund performance data source: Morningstar Direct. Analysis and SUSTAIN Index by Sustainable Research and Analysis.
Chart 3: SUSTAIN Bond Fund Index Performance Results: June 2020 – May 2021
SUSTAIN Large Cap Equity Fund Index Performance
Notes of Explanation: Fund performance data source: Morningstar Direct. Analysis and SUSTAIN Index by Sustainable Research and Analysis.
Chart 4: SUSTAIN Foreign Fund Index Performance Results: June 2020 – May 2021
SUSTAIN Large Cap Equity Fund Index Performance
Notes of Explanation: Fund performance data source: Morningstar Direct. Analysis and SUSTAIN Index by Sustainable Research and Analysis.

ESG sustainable stock indices lagged while ESG bonds came in even

  • ESG stock market indices, as measured by selected MSCI ESG Leaders indices as well as the S&P 500 ESG Index, five indices in total, lagged in May while ESG bonds came in even.
  • Performance differentials in May relative to conventional indices ranged from -0.87% to 0.33%. Refer to Table 1 and Chart 5.
  • The MSCI USA ESG Leaders Index, which tracks large and mid-cap companies with high ESG performance scores relative to their sector peers, is the only benchmark that beat its conventional counterpart, adding an incremental 33 bps to close May at 81 bps. This compared to 40 bps registered by the S&P 500 ESG Index, falling behind the S&P 500 by 30 bps.
  • The S&P 500 ESG Index, based on backcasting over intervals beyond January 28, 2019, as well as the MSCI ACWI ex USA and MSCI Emerging Markets ESG Index, are the only benchmarks to outperform their non-ESG counterparts over the trailing 3-,5-, and 10-year time intervals. The best relative track record has been achieved by the emerging market benchmark that for the trailing 10-year period recorded a positive differential of 3.08%.
Table 1: ESG indices and total return performance results to May 2021
Index 1 MO (%)3-M (%)1-YR (%)3-YRS (%)5-YRS (%)10-YRS (%)
BB MSCI ESG Focus Aggregate Bond0.33-0.15-0.4
BB  US Aggregate Bond0.33-0.14-0.45.1
S&P 500 ESG0.4011.1240.4619.2617.7814.72
S&P 5000.7010.7240.321817.1614.48
MSCI USA ESG0.8110.9039.6319.1417.3913.99
MSCI USA0.489.9441.8118.6117.5614.51
MSCI ACWI ex USA ESG2.706.7941.9210.3811.26.73
MSCI ACWI ex USA3.137.5142.788.9310.885.36
MSCI EAFE ESG3.118.1535.979.479.646.57
MSCI EAFE3.268.8138.418.239.775.88
MSCI Emerging Markets ESG1.452.8452.5111.6115.187.18
MSCI Emerging Markets2.323.28519.6513.884.1
SUSTAIN Large Cap Equity Fund0.218.7640.0518.5
SUSTAIN Foreign Equity Fund2.927.6344.68
SUSTAIN Bond Fund0.360.302.825.6
Notes of Explanation: 3-5-and 10-year returns are average annual; Sources: MSCI, S&P Global, Sustainable Research and Analysis.
Chart 5: ESG indices and total return performance results to May 2021
ESG indices and total return performance
Notes of Explanation: 3-5-and 10-year returns are average annual; Sources: MSCI, S&P Global, Sustainable Research and Analysis
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