While the COVID-19 Pandemic caused severe equity market drawdowns in March and April 2020, this blog by Jack Farrell of the Intentional Endowment Network explores the performance of ESG equity investments during this pandemic and the reasons for their relative outperformance.
The COVID-19 Downturn and ESG Investing
Source: MSCI
Over the past three years, 80% of ESG and ethical funds have outperformed during the bull market, and these funds are proving to be as resilient, if not more so, than traditional equity and debt funds in these unprecedented times (FT). Social and governance factors matter in this time of crisis and research by Morningstar shows that sustainable funds in the U.S. exceeded the broader S&P 500 by 1%, on average, and sustainable funds ex-U.S. outperformed the MSCI EAFE (which excludes the US and Canada) by almost 2%, on average, during the first quarter of 2020 (Morningstar). MSCI’s global sustainable equity indexes outperformed the MSCI All Country World Index (ACWI) by between 1 and 3 percentage points during the first quarter of 2020 in their first true market downturn test since the 2008 recession (MSCI).
ESG equity and fixed-income funds have outperformed for reasons highlighted by reports from Morningstar, BlackRock, MSCI, DWS, Bloomberg, and more. During the crisis, high-quality companies' share prices have tended to be more stable as investors have assigned a premium to robust corporate governance and supply chain management (Financial Intelligence). Additionally, technology companies have benefited from the transition to working at home and renewable energy has weathered the storm of the recent crash in oil prices, both of which tend to feature prominently in ESG indices (Bloomberg). Although sinking oil prices are one part of ESG’s success, there are inherent advantages to being prepared for long-term resilience during crises such as the pandemic (Responsible Investor).
When interviewed about the impact of coronavirus on ESG funds at higher education endowments, Jeffrey Mindlin, Vice President and Chief Investment Officer of Arizona State University Enterprise Partners, said, “We saw real-time evidence of the efficacy and resilience of sustainable strategies during this sell-off as well as tangible, first-hand experiences around the social and environmental challenges we face”. Additionally, in a recent article, John Streur, president and CEO of Calvert Research and Management, was quoted that ESG “Performance has held up quite well… companies that have been thoughtful about managing social and environmental risks were prepared to deal with this risk” (Pensions&Investments). Before the Covid-19 pandemic, IEN had been tracking how higher education endowments have made sustainability a priority in our recent report, Financial Performance of Sustainable Investing: The State of the Field and Case Studies for Endowments, and early signs from Bloomberg and Chain Reaction Research indicate that these portfolios should continue to hold up well during the downturn.
There will continue to be reports and analysis as COVID-19 causes much of the global economy to shut down. However, the past several weeks support the idea that integrating environmental, social, and governance factors reduce investment risk and create additional opportunities to outperform. IEN will continue to monitor and report how ESG investments fare throughout the downturn and how higher education institutions are integrating ESG factors into their intentionally-designed endowments.
Below are some selected sources about ESG investments during the COVID-19 Pandemic. Click here for a full collection of resources about ESG investments during and after the COVID-19 Crisis
Sustainable Investing: Resilience Amid Uncertainty | BlackRock, May 2020
Sustainable Funds Fell Less During the Selloff | Wall Street Journal, May 2020
What does the oil slump mean for green investment? | Responsible Investor, May 2020
ESG proves its resilience in the fastest bear market in history | The Asset, April 2020
The Chain: How the COVID-19 Crisis is Affecting ESG Investing | Chain Reaction Research, April 2020
Coronavirus ESG Monitor | TruValue Labs, April 2020
Mercer: COVID-19 elevates the value of responsible investing | Responsible Investor, April 2020