Responsible investment outperforms during COVID-19

In my previous blog, I wrote about how I did not believe that COVID-19 had killed responsible investment but rather early indications had reaffirmed the ability of ESG criteria to serve as a competitive and differentiating factor in accessing capital in the post-COVID world.

In this blog, I provide some of the emerging evidence for this.

Pre COVID Performance

The 2019 RIAA (Responsible Investment Association Australasia) benchmark report highlighted that responsible investment funds out performed mainstream funds. In particular:

  • Responsible investment International RI share funds outperformed the Morningstar average mainstream international share fund over every time horizon, and;
  • Responsible investment multi-sector funds outperformed the mainstream multi-sector growth fund average over every time horizon.

The superior performance of these funds was also supported by the continued growth in investment inflows. According to research by Morningstar, estimated net flows into US open-end and exchange-traded sustainable funds was nearly four times the previous record set in 2018.

@_keastie_

Post COVID

Entering 2020, with the world largely naive to the upcoming global pandemic, I expected to see a continuation of the positive trajectory of growth and performance of ESG funds. Now a few months into 2020, the impacts of Covid-19 are being felt and have shattered financial markets around the world. During February and March we have seen a significant economic downturn and many commentators are still questioning whether the worst is yet to come.

Having said this, it is clear that ESG funds have continued to outperform their mainstream counterparts. How do we know this?  The Q1 results are clear; despite trillions of dollars being wiped off the market, globally, ESG funds simply lost less.

Morningstar report that in the first quarter of 2020, which saw the biggest downturn in stock prices globally, “the returns of nearly two thirds (65 percent) of sustainable equity funds ranked in their category’s top half. More than four tenths (43 percent) placed in the top 25 percent of their group, and only 10 percent were in their peer group’s bottom 25 percent”.

Morningstar are not alone in recognising the positive performance of ESG. MSCI (Morgan Stanley Capital International) recently reported that, “We observed a positive performance contribution from ESG across four select MSCI ESG indexes (MSCI ACWI ESG Universal, the MSCI ACWI ESG Leaders, the MSCI ACWI ESG Focus and the MSCI ACWI ESG SRI) and across some regions during Q1 2020. These results were consistent with longer-term performance.”

We have also began to see the reports of inflows of capital into sustainable funds, with Q1 global sustainable open-ended funds seeing a 41 percent year on year increase (approximately USD40.5 billion). The US alone saw USD7.3 billion enter sustainable funds in Q1. This figure would have been impressive irrespective of COVID-19 given it is  a quarterly record for U.S sustainable funds and is more than half of all inflows recorded in 2019.

As more information is reported, I expect we will only continue to see more positive news of ESG continue emerge.

It is worth acknowledging that this data is only representative of a short timeframe, during which the full impact of the pandemic has arguably not yet been felt. I do believe however, that the positive performance of ESG funds post COVID-19 is a direct reflection of the qualities that differentiate them from their mainstream competitors. The combination of enhanced risk management practices, and investment acknowledging long term mega trends make them inherently better to weather future challenges and uncertainty.

The future

But this is still a new and relatively immature market. To ensure the continued growth of these funds in a way that is both responsible and provides confidence to investors, two key things need to happen:

  • The enhancement and standardisation of screening methods to ensure transparency and consistency, and;
  • The development of sustainable finance taxonomies that provide structure and clarity.

Hopefully 2020 will be the year in which we see improvements in both globally and here in Australia. With the development of the EU “Green” Taxonomy and the results of the Australian Sustainable Finance Initiative (AFSI) interim report becoming available later in the year, things are looking promising.

Even Larry Fink agrees. In his [latest] CEO letter he states that “We’ve seen sustainable portfolios deliver stronger performance than traditional portfolios during this period. When we emerge from this crisis, and investors rebalance portfolios, we have an opportunity to accelerate into a more sustainable world”.

The opportunity are presented with is a unique one, and one I hope will be maximised and leveraged to finance a more sustainable world going forward.

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