Investment into funds with low environmental, social, and governance (ESG) risk has taken off amid the COVID-19 pandemic.

What's compelling investors is not just stakeholder interests or the need to address the climate crisis but competitive returns.

“Having invested in renewable energy... at least since the late '80s, this is probably one of the most interesting times to be looking at this area,” Afsaneh Mashayekhi Beschloss, the founder and CEO of the Rock Creek Group and former treasurer and chief investment officer at the World Bank, said on Yahoo Finance Live (video above).

Interest in ESG investing has waxed and waned in years past, Beschloss explained. At universities and foundations, “you would have people on the scientific side who were talking about climate change. On the endowment side, you did not have necessarily the same conversations until recently.”

That said, this trend seems different.

“What has changed — and I think COVID expedited it and augmented the speed of change on ESG investing — is if we look in the last 15, 16, 17 months, whether you're talking about education and the intersection of education with technology, whether you're talking about health sector and all the developments in biotech, whether you're looking at affordable housing, and then specifically, of course, on climate change-related investments, these are all areas that have exceeded, in terms of returns, the traditional form of investing.”

'Highest return potential' in ESG

In 2020, the overall number of open-end funds and exchange-traded funds (ETFs) increased by 30% in the U.S. and attracted $51.1 billion in net flows (more than double the record set in 2019), according to a Morningstar report.

The report also found that funds that put ESG concerns at the center of the investment process outperformed their conventional peers in 2020. Likewise, the Morgan Stanley Institute for Sustainable Investing found that between January and June of 2020, when the S&P 500 hit its pandemic bottom, sustainable equity funds outperformed peers by a median return of 4.3%, and sustainable bond funds outperformed them by a median return of 0.9%.

However, measuring ESG returns can be a fraught business as there are currently no uniform standards, definitions, or disclosure requirements that companies must adhere to when reporting environmental impacts in the United States. This can make comparing ESG ratings across sectors and asset classes a challenge for investors.

But that hasn't discouraged investors from taking an ESG approach.