Why ESG investment is the ultimate contrarian play

New research shows that sustainable investing is about betting on expectations rather than reality

Why ESG investment is the ultimate contrarian play

A few months after the #MeToo movement took off, gender-focused sustainable funds saw increased inflows, and a new women-focused ETF made a splashy debut in Canada. Earlier this year, a horrific mass shooting in the US reignited the gun-control debate and caused investors — as well as asset managers — to re-examine their stakes in gun manufacturers.

There appears to be a pattern: values-based investing tends to increase when investors sense an urgent need for change. And that’s the thesis borne out by an analysis of inflows into US stock ETFs and mutual funds with Environmental, Social, and Governance (ESG) mandates, as reported in the Wall Street Journal.

“While most traditional investors run for the hills when news comes out that conflicts with their expectations or ideas about the world, sustainable investors appear to dedicate more of their money to the cause when news or policy decisions that go against their values are announced,” professor Derek Horstmeyer of George Mason University said in the Journal.

That conclusion was supported by data compiled in conjunction with Lisa Hodges, a financial planner at Centered Wealth and founder of the ESG-investing online platform Shift to Impact.

In December 2016, for example, US$2.1 billion reportedly flowed into US equity sustainable funds from a so-called “Trump bump” one month after the US president’s election. That represented a 3.5% increase in the category’s total AUM as of November 1.

“Since the election, US$8.1 billion has flowed into these funds, a 13.1% jump from the assets under management on the eve of the 2016 presidential election,” Horstmeyer said. Fund companies also seem to be taking heed as the number of sustainable US equity funds has risen nearly 50% over the past three years.

Focusing on specific themes revealed a similar pattern. Environmental funds saw US$50.1 million in outflows — which translated into a 1.05% drop in assets — in the month after the 2015 Paris Climate Agreement was signed. Conversely, President Trump’s decision to withdraw the US from the agreement in June preceded a US$98.5-million infusion of investment — representing a 1.32% increase in AUM — into the funds.

Following accusations and revelations of sexual abuse in Hollywood, the US-listed iShares MSCI KLD 400 Social ETF experienced its biggest monthly inflow of US$48 million during November.  Within the four months after the news of producer Harvey Weinstein’s indiscretions, the TIAA-CREF Social Choice Equity Fund institutional class took in US$211 million — an infusion of 11% from a base of US$1.9 billion.

“Many factors are driving the increasing popularity of sustainable investing … but macro political and cultural trends are clearly the largest drivers — specifically, negative news that conflicts with sustainable investors’ views of the world,” Horstmeyer said.


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