ESG investment continues to defy havoc
When markets went into freefall last spring, investors fled mutual funds apart from one sector: sustainable investing. This area, where environmental, social and governance issues are factored into investment decisions, had long been viewed as niche, often the preserve of charitable foundations and religious orders. However, 2020 was the year ESG came of age.
Despite the big sell off last March, sustainable funds ended the first quarter of 2020 with net sales of $38.8bn globally, compared with outflows of $373bn for all long-term mutual funds, according to Morningstar, the data provider. By the end of the year, the total assets in sustainable funds hit a record of almost $1.7tn, up 50% over the year, on the back of a record year for sustainable fund sales.
From the investment perspective, the rise of sustainable investing was the dominant story parallel with the Covid-19 crisis. Lots of ESG funds outperformed and that galvanised appetite to start allocating more capital. Research from BlackRock, the world’s largest asset manager, also found that ESG strategies outperformed during last year’s period of intense volatility, with 94% of leading sustainable indices beating their parent benchmarks in the first quarter.
The strong sustainable fund sales and performance came in spite of predictions the pandemic would damage the growth of the industry. Sceptics argued that a recent focus on ESG issues would be ditched as companies simply battled to stay afloat. However, big asset managers said the pandemic highlighted how catastrophic events, such as climate change, would impact investment returns. The crisis also increased attention on the S of ESG, with investors and society increasingly focused on how companies treat all their stakeholders, from employees to suppliers to shareholders.
Interestingly, the growing interest in ESG is not shared equally around the world. Europe is by far the most developed market, accounting for close to 70% of the global sustainable fund universe, according to figures from Morningstar. Assets under management in sustainable funds have grown almost fourfold from $450bn in 2011. Signs exist that interest is picking up in other markets, including the US. Last year, sales of sustainable funds in the US stood at $50bn, far below Europe’s $233bn but more than double the previous year’s numbers. The election of Joe Biden, who has promised green reforms, is expected to further drive interest.
Many active managers have piled into ESG investing in recent years, believing it will help revive their fortunes after struggling to compete against the rise of passive funds which track an index rather than actively choose stocks. Active funds account for almost $1.3tn of the $1.67tn assets under management in sustainable funds. Last year, the assets under management in sustainable actively managed funds jumped 45%.
Since we launched our three risk rated ESG funds in the Autumn of 2020, investors have enjoyed better than expected returns albeit this is very short-term. We remain confident that the ESG sector will continue to thrive and if you want to speak to us about this investment option, contact you Prosperis adviser on 01423 223640 or email us below.
