In spite of significant market drawdowns, funds that employ ESG criteria have broadly fared well year-to-date, dispelling the myth that investing responsibly means missing out on returns.
A scan of the Investment Association’s global equity sector supports this trend. The average global equity fund has returned 3.7 per cent in sterling terms since the beginning of the year to 14 August.
Yet funds awarded an above average or high sustainability rating by Morningstar in the same sector achieved close to double this, with an average return of 7.3 per cent over the period. This also compares to a 3.7 per cent rise by the MSCI World index.
Research by Bank of America Merrill Lynch (BofAML) showed the top 20 per cent of ESG-ranked stocks outperformed the US market by more than 5 per cent during the March sell-off. And this trend continued into the second quarter – although the outperformance was less marked, as investors rotated into more economically sensitive stocks.
It is a similar story over longer time periods. Morningstar’s data shows the majority of a 745-strong sample of European-domiciled ESG funds outperformed their non-ESG counterparts over one, three, five and 10 years up to December 2019.
The ESG tipping point
This dispels the myth that ESG investing is merely a short-term fad – a view that was echoed by both groups. There was universal consensus that the tipping point for ESG is already behind us, with 97 per cent of the combined group agreeing or strongly agreeing that ESG factors will become increasingly important to investment performance.
Three out of five non-ESG advisers started having conversations about ESG with their clients over the past five years, while only 3 per cent of the combined total said they do not currently engage with clients on this topic.
This finding suggests that ESG has moved into the mainstream, as awareness has grown about topics like climate change, plastic pollution and sustainable business practices.
The ongoing COVID-19 crisis, and the disruption it has caused to our day-to-day lives, may well have caused some of your clients to re-evaluate their values and priorities. This, in turn, could lead to greater scrutiny of their underlying investments.
94 per cent of non-ESG adopters expect their allocation to ESG investments will grow over the next three years, 4 per cent higher than ESG advisers.
What is more, every adviser surveyed agreed that ESG will play a more important role over the next five years. It is encouraging to see that 80 per cent of advisers across both groups view this as a positive development.
The regulatory backdrop will no doubt support this trend. From early 2021, advisers will be required to take ESG considerations into account during conversations with clients as part of the MiFID II sustainable finance measures.
