Public mutual funds with environmental, social, and governance (ESG) themes in South Korea outperformed both non-ESG funds and the broader market over longer investment horizons, while also showing lower downside risk, according to a new report.
Seoul-based ESG ratings and advisory firm Sustinvest analysed 188 domestic ESG funds that met disclosure standards introduced by South Korea’s Financial Supervisory Service in 2023.
Combined net assets of the funds stood at KRW9.6 trillion won (US$6.9 billion) as of end-December 2025, up 2.3 per cent from KRW9.38 trillion in the first half of the year, despite net outflows of KRW851.6 billion during the second half, the report said.
Domestic active equity ESG funds posted average returns of 37.22 per cent over six months, 83.20 per cent over one year and 112.20 per cent over three years, outperforming non-ESG active equity funds, which returned 35.08 per cent, 77 per cent and 107.18 per cent, respectively.
The ESG funds also outperformed South Korea’s benchmark KOSPI over longer periods. The KOSPI returned 37.19 per cent over six months, 75.63 per cent over one year and 88.44 per cent over three years, according to the report.
While ESG equity funds performed similarly to the KOSPI over the six-month period, the performance gap widened over one- and three-year horizons.
Domestic active bond ESG funds also outperformed conventional bond funds, posting returns of 0.75 per cent over six months, 3.46 per cent over one year and 18.03 per cent over three years, compared with losses of 0.27 per cent, gains of 1.99 per cent and gains of 14.77 per cent for non-ESG bond funds.
Sustinvest said the strong performance was partly linked to a rally in large-cap blue-chip stocks in the second half of 2025, as ESG portfolios tend to be more heavily weighted toward large-cap companies than non-ESG funds, which often include more small- and mid-cap holdings.
“Through this analysis, we confirmed that excess returns from ESG funds expand as investment horizons lengthen, generating higher alpha from a long-term perspective,” said Choi Bo-kyung, head of investor solutions at Sustinvest in the report.
The report also found that ESG funds demonstrated lower downside risk over the long term.
According to the report, ESG and governance scores showed a statistically significant negative correlation with downside deviation over a three-year period, suggesting that funds with stronger ESG performance experienced lower volatility during periods of negative returns.
Downside deviation measures only the volatility of returns below a target level, unlike broader volatility indicators that capture both upward and downward price movements.
Maximum drawdown, a measure of the largest peak-to-trough decline during an investment period, was also lower for ESG funds than non-ESG funds.
Domestic active equity ESG funds recorded maximum drawdowns of 9.18 per cent over six months, 13.26 per cent over one year and 20.68 per cent over three years, compared with 9.68 per cent, 14.38 per cent and 22.64 per cent for non-ESG funds.
“The superior risk-adjusted performance of ESG funds could become a strong argument supporting ESG investing for long-term institutional investors such as pension funds,” said Ryu Young-jae, chief executive of Sustinvest, citing upcoming revisions to South Korea’s stewardship code that are expected to place greater emphasis on sustainability oversight and fiduciary responsibility.
