The Covid-19 crisis proves the rentability of sustainable investments – not despite of, but especially in times of crisis.
In early 2020, the financial community watched in horror as the rapid spread of the Covid-19 virus prompted a global market sell-off. However, some looked with interest at another trend: the relative stability of sustainable investments. “Through the end of March, they maintained the performance that had been in place since earlier in the month,” says Jon Hale, head of sustainability research for Morningstar, referring to the US market.
In his analysis of fund performance, Hale focused on the US large cap market and compared ESG equity funds (funds that integrate environmental, social and governance factors into the investment process) with peer groups that contained conventional or non-ESG funds.
“The ESG funds tended to finish in the top half and even the top quartile of their overall peer groups,” he says. “In fact, 70 percent of ESG funds finished in the top half of their peer groups. So they were over represented in the upper echelons of their peer groups pretty consistently.”
This might come as a challenge to the traditional views of some financial advisors; namely, that making sustainable investments is good for society and the planet but not for the bottom line. A watershed moment came in 2019, when in his annual letter to CEOs Larry Fink, CEO of BlackRock, the world’s largest asset manager, urged companies to re-examine their corporate purpose and to spend more time focusing on social and environmental challenges than on profit maximisation alone.
Individuals have also become aware of how their money can have an impact. “We’re all owners through our investments,” says Andre Shepley, director of ESG research at Truvalue Labs, which uses artificial intelligence to provide clients with ESG data and analytics. “On the consumer side, people are more conscious about what they eat. Now we’re seeing that happen on the investment side.”
As a result, investment funds have been pouring into sustainable and impact investing portfolios. In 2019, investors put a record USD 21 billion into socially responsible funds – up fourfold from 2018, according to Morningstar.
Even as markets reacted to the pandemic, the movement of capital into ESG-focused financial products held up. For example, Morgan Stanley analysts found inflows into ESG-focused fixed income lost just 1.3 percent of assets under management, compared to outflows of 5.2 percent for those in the traditional market.
The Covid-19 crisis has only accelerated these trends, with renewable energy, biotech and technology investments performing well. “The world has been forced into adopting sustainable practices through the Covid crisis,” says David Macdonald. “And it’s benefited the very types of business you’re going to be aligned with if you’re invested in sustainable or impact funds.”
Of course, part of the success of ESG investments in recent months has resulted from the dramatic fall in oil prices, since ESG funds have low fossil fuel exposure and focus their energy investments on companies generating renewables, such as wind and solar power.
However, experts argue that the effect will go beyond the short-term oil price shock. “In all likelihood, oil prices will stay low for some time to come,” says Georg Kell, chairman of Arabesque Partners, an ESG Quant fund manager that uses machine learning and big data to assess the performance and sustainability of globally listed companies. “Big oil companies are all preparing for more innovation and doubling down on their exit strategies.”
The pandemic – with indications that ever-closer proximity between humans and animals could lead to similar outbreaks in the future – has raised the profile of another ESG factor: biodiversity and habitat protection, says Jill Atkins, a professor and chair in financial management at Sheffield University.
Lack of biodiversity, such the loss of pollinators such as bees, also affects sectors such as food and agriculture. “There are material financial risks associated with biodiversity loss,” says Professor Atkins. “Investing in companies that perform better in terms of biodiversity risk management and species protection is more financially viable.”
In addition to creating a more robust, resilient portfolio, Hale argues that sustainable investment could even be the next form of political advocacy. This is in line with the ESG approach of active ownership, namely, working towards ESG goals with the objective to enhance long-term shareholder value. “You can be a voter and try to effect change but you can also do it as an investor,” he says. “And when you join with lots of investors all pushing for the same thing, it can make a pretty big difference.”
Image: Keystone SDA / Peter Menzel
Responsible and sustainable investments is important not only in times of crisis, but also in general. LGT supports its clients in making their investment portfolios more sustainable. With its usstainability funds, LGT invests in companies, organizations and countries that have an exemplary environmental and social track record and that add long-term value from a financial perspective. You can find more information here.