Wealth Management: Strategy blog – 2020: ESG maintains momentum
Strategy team - Kevin Gardiner and Charlie Hines
With the advent of a global crisis comes the almost inevitable reflection as to the way in which we live our lives. Environmental, Social and Governance-aware (ESG) investing however was already riding a wave of growing popularity even before the crisis hit, with 2019 marking a record year of inflows into sustainable funds.
In the UK, January 2020 saw £395m of inflows to ESG funds, as much as in the three years to 2017 combined (according to Calastone research). Inflows were still strong as recently as April, at £334m. Globally, despite the pandemic, and the subsequent risk-off sentiment - the equity fund universe saw outflows of $385bn, according to Morningstar - sustainable funds recorded $46bn of inflows over the first quarter, with 73% of this heading into European funds.
Though ESG-themed investments in the UK remain a small part of the total investment universe - around 3% of the UK funds market according to Calastone - forward looking sentiment surveys suggest the share will continue to increase. A recent Deutsche Bank survey suggests that when it comes to allocation decisions, almost two-thirds of hedge fund investment decisions are shaped by ESG related factors. Long-only investors may be thinking similarly.
Not only are ESG funds taking market share, performance isn't bad either. A recent Blackrock study found that the vast majority of sustainable indices outperformed their respective parent benchmarks in the first quarter of the year, partly because of the exclusions of traditional energy and basic material companies, which performed particularly poorly. Of course, one quarter of performance is hardly definitive, but it does make the point that to invest responsibly doesn't necessarily require a trade-off with performance.
Arguably, in times of market turbulence and uncertainty it may make even more sense than usual for investors to look to resilient and 'sustainable' companies with robust governance. Companies with high employee engagement, strong customer and societal relations, and an effective board - all key ESG characteristics - are likely to be less volatile and could offer greater risk-adjusted returns. Past performance is no guarantee of future returns, of course, but the momentum behind ESG-oriented investing seems likely to continue.
MSCI World SRI (Socially Responsible Investing) Select Index is designed to target companies with high ESG ratings relative to their sector peers, while excluding companies with high negative social or environmental impact.
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