ESG-oriented strategies have benefited by evading COVID-19 headwinds and addressing key risks
While most equity funds were hit by coronavirus-influenced selloffs in the first quarter, funds that followed ESG strategies have held up better, posting smaller declines than their non-sustainable peers.
Citing data from FactSet, the Wall Street Journal reported that nearly 60% of the largest U.S. sustainable and ESG mutual funds and ETFs lost less in market value than the S&P 500. Similarly, data gathered by UBS Asset Management has found that ESG versions of both developed- and emerging-markets indexes did better than their benchmark parent indexes.
“[T]he socially responsible version of the MSCI World Index brought 2.03 percentage points in excess return compared with the broader market [from February 20 to March 30],” the Journal said, citing the UBS data.
Morningstar data also revealed that in spite of the broad decline in valuations, sustainable funds in the U.S. absorbed a record US$10.5 billion in investor inflows.
Because a considerable proportion of ESG indexes were introduced after the 2007-09 financial crisis, most ESG funds are relatively new, making the recent coronavirus selloff their first trial by fire. But sustainable-investment experts are quick to downplay findings of their relative outperformance, as a three-month window is too short for broad conclusions to be made about the long-term strategies.
To be sure, one driver of the recent outperformance appeared to be a fluke. U.S. ESG funds tend to underweight in the energy sector, which has suffered because of massive demand deterioration in fossil fuels amid government-imposed lockdowns around the world.
The top performers for the period include the US$3.6-billion Calvert Equity Fund which invests in large-caps with strong cash flows and high returns on capital while excluding fossil-fuel reserve companies and tobacco.
Another is the Brown Advisory Sustainable Growth Fund, which has outperformed both its benchmark Russell 1000 Growth Index and the S&P 500 so far in 2020. One of its portfolio managers, Karina Funk, highlighted three risks they watch that have been exposed by the pandemic: how companies manage their workforce, how they support their customers, and how they keep innovating amid turbulence.