ESG Funds Outperform Peers and Benchmark over Longer Term, South Korean Study Finds

Why It Matters

The results give institutional investors concrete evidence that ESG integration can boost long‑term returns while reducing downside risk, supporting upcoming stewardship‑code reforms in South Korea and encouraging broader adoption of sustainable investing.

Key Takeaways

• ESG equity funds delivered up to 112% three‑year return.
• ESG funds outperformed KOSPI over one‑ and three‑year horizons.
• Downside risk and drawdowns were lower for ESG versus non‑ESG funds.
• Large‑cap weighting contributed to ESG outperformance.
• Study supports ESG as long‑term alpha source for institutions.

Pulse Analysis

The South Korean research firm Sustinvest has released the first comprehensive performance review of domestic ESG‑focused mutual funds since the Financial Supervisory Service introduced mandatory ESG disclosure in 2023. Analyzing 188 funds with a combined net asset value of KRW 9.6 trillion (about US $6.9 billion), the study finds that active equity ESG funds generated 37.2% returns over six months, 83.2% over one year and a striking 112.2% over three years. Those figures not only beat non‑ESG peers but also surpassed the KOSPI benchmark, especially on longer horizons.

The outperformance is matched by a superior risk profile. ESG equity funds recorded maximum drawdowns of 9.2%‑20.7% across six‑month to three‑year windows, compared with 9.7%‑22.6% for their non‑ESG counterparts, while downside deviation showed a negative correlation with ESG scores. In the bond space, ESG‑aligned funds posted modest positive returns while non‑ESG bonds still posted losses in the short term. The data suggest that ESG screening adds a volatility dampening effect, a trait prized by pension funds and other long‑term investors.

The findings arrive as South Korea prepares to tighten its stewardship code, urging fiduciaries to integrate sustainability oversight. For institutional investors, the study provides empirical backing that ESG integration can generate alpha without sacrificing downside protection. Global asset managers watching the Korean market may view the results as a bellwether for other regions where ESG mandates are nascent. As regulators worldwide push for greater transparency, the Korean experience underscores the business case for embedding ESG metrics into core investment processes.