ESG investments performed well during market volatility
Chris Broome – Chartered Financial Planner
The social distancing restrictions associated with Covid-19 have affected businesses globally, leading to volatility within the investment markets. However, figures suggest that those investments that have considered ESG factors may have fared better.
ESG, or environmental, social and governance, factors consider the reasons for investing beyond simply the returns, though this is still important.
Investors’ concerns about these areas may consider the impact businesses have on climate change, human rights abuses within supply chains, executive remuneration and other areas. The trend for ESG, sometimes also referred to as sustainable or SRI (socially responsible investing) has been growing.
It’s a way of reflecting wider values in your investment decisions, but can it improve returns too?
MSCI: ESG funds outperform
Research has previously pointed to ESG funds being less exposed to systematic risks and therefore more resilient to shocks However, as it’s still a relatively new trend, data is limited. The Covid-19 pandemic has provided an opportunity to measure ESG funds against broad-market counterparts.
Overall, the figures suggest that many ESG indices held up better than those without ESG considerations, though volatility and downturn were still experienced.
MSCI, an investment research firm that provides stock indexes compared how four ESG indexes have performed in comparison to the parent index, the MSCI ACWI Index, which provides a broad measure of equity-market performance compromising of stocks from 23 developed countries and 24 emerging markets.
The figures show:
| MSCI ACWI | MSCI ACWI ESG Universal | MSCI ACWI ESG Focus | MSCI ACWI ESG Leaders | MSCI ACWI SRI | |
| Year to date | -21.3% | -20.1% | -20.6% | -19.9% | -18.4% |
| 1 year | -10.7% | -8.4% | -9.2% | -8.5% | -5.2% |
| 3 years | 2% | 3% | 3% | 3% | 4.9% |
| 5 years | 3.4% | 4% | 4.3% | 3.9% | 5.1% |
Source: https://www.msci.com/www/blog-posts/msci-esg-indexes-during-the/01781235361
The findings indicate that all the ESG funds have outperformed the parent index in the short and medium-term amid the Covid-19 outbreak. While the figures take a short-term view and offer limited scope, they could indicate that ESG factors have a positive influence on performance.
As well as the above limitations, there are some things to note. First, past performance isn’t a reliable indicator of future performance. Just because ESG funds have outperformed in this case, doesn’t mean they will in the future.
As the impact of coronavirus is still being felt, it’s impossible to assess the full effects. For example, the MSCI ACWI may experience higher levels of growth as markets recover.
Second, investments need to consider your risk profile and goals too. A fund performing well over the last few years doesn’t necessarily mean it’s an appropriate investment option for you.
Reflecting values in investments
Of course, while returns and volatility are an important part of making investment decisions, ESG looks at different factors too.
Incorporating ESG values into investment decisions can help align your portfolio with beliefs and priorities. It’s a trend that’s on the rise too. Last year research found that 21% of investors said they cared about ‘only the money’ when investing. In contrast, 30% stated they were equally concerned about whether their investments make money and make a positive difference.
As incorporating ESG factors into investment decisions become more commonplace, it’s easier for investors. There are now more funds that focus on certain areas of ESG and businesses are increasingly publishing more information about their working practices, from efforts to reduce carbon emissions to the way they are working with local communities.
If you’re interested in beginning to bring ESG factors into your portfolio, now is a good time to do so.
However, adding another consideration to investment decisions does come with challenges. It may limit your investment options and defining what ESG covers or the benchmarks by which companies are judged are often subjective.
It’s still equally as important to consider the usual investment factors, such as risk profile and diversifying your portfolio.
Next Steps
If you’d like to discuss ESG factors and how they could be incorporated into your investment portfolio, while keeping your aspirations in mind, please get in touch.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
