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Sustainable investments are growing, and outperforming, in a volatile market



ImpactAlpha, Apr. 14Companies that merely pay lip service to stakeholders risk exposure in a crisis. Companies that take care of their employees, effectively manage risk and efficiently use resources tend to hold up.

Evidence is mounting that investments in sustainable businesses are performing well – on a relative basis – through the COVID crash.

“Those companies that consistently embrace their principles, their workforces, and their unique competitive advantages will outperform,” says Cornerstone Capital’s Erika Karp in “ESG Fund Performance in Volatile Markets.”

Good governance, she says, is a proxy for quality, innovation and resilience. Case in point: Most environmental, social and governance, or ESG, funds were insulated from the collapse in oil prices by their limited exposure to fossil fuels and industries like airlines and cruises.

ESG’s relative performance in the downturn has been driven by “very limited exposure to the entire fossil-fuel chain,” says John Streur of Calvert Research and Management, which manages $22 billion in sustainable assets. “It is clear that companies that have been thoughtful about managing social and environmental risks were prepared to deal with this risk.”

A few indicators:  

Sustainable public equities funds are outperforming. Sustainable funds lost less than their non-sustainable peers between January 1 and March 31, according to Morningstar’s Jon Hale. All but two of 26 ESG-weighted index funds, for example, outperformed conventional counterparts. Just Capital’s large cap diversified index, which includes the top half of Russell 1000 companies ranked by “JUST” scores on worker treatment, customer concerns and environmental impacts, has outperformed the broader Russell 1000 by 100 basis points since the market’s peak on Feb. 21.

Sustainable funds are seeing record inflows. Investors moved $10.5 billion into 314 open-end and exchange-traded sustainable funds U.S.-based sustainable funds in the first quarter, according to Hale, a new record after 2019’s fourth quarter shift of nearly $8 billion. BlackRock’s 16 iShares ESG exchange-traded funds commanded $6.3 billion of the total, followed by Vanguard, Calvert, Dimensional and TIAA/Nuveen

The trend is global. Since the start of last year, the 100% sustainable portfolio of UBS’s private banking unit in Asia more than doubled to $1 billion in assets. UBS says about 60% of the investments are coming from Greater China and that demand has heightened since the Covid-19 outbreak.

Legacy firms are affirming ESG commitments. The pandemic “has underscored the complexity and interconnectedness of our world in terms of demand and supply, in trade and commerce – and how these can be under threat if not sustainable,” says Nigel Green, head of deVere Group, which advises $12 billion. DWS (which manages $834 billion) and Insight Investment ($820 billion) are among mainstream firms recommitting to ESG integration. 

Others are gearing up. Barclay’s is launching a “Fundamental ESG Research” unit to explore whether the COVID outbreak is “creating a greater sense of urgency and responsibility toward everything from consumer behaviour to climate change, supply-chain practices and the future of work and mobility – and potentially alter the nature of the investment process as a result.”

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