A strong relative performance in the first quarter of 2020 and heightened awareness over social issues is shining a spotlight on environmental, social and governance (ESG) investing.
ESG investing has drawn more assets each year, and Morningstar data from May shows sustainable fund flows were resilient during the market selloff caused by the coronavirus pandemic. During the first quarter, the global sustainable fund universe pulled in $45.6 billion versus an outflow of $384.7 billion for the overall fund universe, the research firm said. U.S. flows accounted for 23 percent of that first-quarter figure.
Of course, ESG funds lost money during the market selloff, but they lost less than the broader market during that time, performing better on a relative basis, Morningstar said in a different report. During the first quarter, the returns of 70 percent of sustainable equity funds ranked in the top halves of their categories, and 44 percent ranked in their category’s best quartile, the firm said.
The same was true for index funds. Based on a comparison of 26 sustainable index funds with those of conventional index funds covering U.S. stocks, non-U.S. developed-markets stocks and emerging-markets stocks, 24 of them outperformed the comparable conventional index fund.
Second quarter data showed most sustainable funds finished in the top halves of their Morningstar Categories, and 18 of 26 ESG-focused index funds outperformed conventional index funds that cover the same parts of the market, the research firm said.
Social Issues Becoming More Important
The impact of the global economic shutdown because of the pandemic threw millions out of work in the U.S., leading to a focus on workplace issues, including safety, flexibility and healthcare. Moreover, the murder of George Floyd and protests over systemic racism brought a new awareness of diversity – or lack thereof.
A July survey by BNP Paribas Asset Management about ESG showed social issues are gaining prominence among investors, “highlighted by an increase of 20 percentage points since the onset of Covid-19.” Additionally, 79 percent of respondents cite social considerations as having a positive impact on long-term investment performance and risk management.
None of this surprises Craig Jonas, CEO of CoPeace, an impact holding company.
“We believe strongly that it’s a good business decision to care about the long-term future of our world,” he says.
Women and younger investors have historically driven interest in ESG investing, Jonas says, and that should continue. And financial advisors are likely to get more interest from these clients about ESG, he adds.
Catherine Banat, director of U.S. responsible investing at RBC Global Asset Management, says she’s been hearing consistently “that a lot of advisors are feeling the sudden urgent need to get educated about this because their clients are asking them questions.”
Finding Social Metrics
When it comes to ESG, the “S” part, or social, wasn’t given as much focus as environmental and governance factors, so financial advisors who want to help clients create portfolios that take into account social issues may find it a bit tough because the social pillar has the fewest metrics. Sudhir Roc-Sennett, head of ESG at Vontobel Quality Growth, a boutique of Vontobel Asset Management, has done research into diversity and corporations and agrees the social pillar is “very data challenged.”