14/06/2021
Covid-19 had a transformative impact on our daily lives.
From an economic perspective, the pandemic shrunk the global economy by around 4.4% in 2020, according to statistics from the International Monetary Fund, reported by the BBC. The IMF described the crisis as the worst decline since the Great Depression.
For investors, Covid-19 encouraged them to look far more closely at corporate behaviours than ever before.
Companies with sound corporate governance were able to withstand financial shocks, while businesses offering their employees private healthcare, flexible working, and mental health support were repaid in staff loyalty and workforce reliability.
At the same time, organisations that had spent time to understand their supply chains found they were better able to anticipate delays and shortages.
In short, Covid-19 accelerated interest in ESG investment and increased the appeal of companies scoring well on environmental, social and governance criteria.
This trend is among several topical issues being discussed at the Reuters ESG Investment Conference, taking place on 15 June 2021. The event includes a presentation considering the role that ESG investing will have in the post pandemic recovery.
The Covid boost
Research in Finance discovered that responsible funds were considered as “a core part of a mainstream portfolio” by 46% of retail investors in its poll of 210 investment intermediaries conducted in November and December 2020.
This was a dramatic rise from the 33% who gave the same response in the poll a year earlier, conducted as part of its UK Responsible Investing Study.
A similar trend has been playing out in the institutional marketplace. Research conducted among 152 consultants and pension schemes for the same study found that 51% of institutional investors said that investing responsibly was more likely to improve performance in the most recent survey, compared to just 48% a year earlier.
Investors have also been influenced by the fact that the corporate resilience of sustainable companies throughout the pandemic has started to come through in the numbers.
An analysis of 26 ESG funds, published in April 2021 by S&P Global, found that three quarters of the sustainable strategies reviewed had outperformed their benchmarks during the first year of the pandemic.
Not everyone agrees
However, separate research published by Scientific Beta challenges recent claims of ESG outperformance. The paper argues ESG strategies don’t offer significant outperformance when returns are analysed on a risk-adjusted basis.
“Omitting necessary risk adjustments and selecting a recent period with upward attention shifts enables outperformance to be documented where in reality there is none,” Dr Noël Amenc, chief executive officer of Scientific Beta claimed.
“Investors should ask how ESG strategies can help them to achieve objectives other than alpha, such as aligning investments with their values and norms.”
It further suggests that ESG funds may have performed well thanks to strong biases towards certain sectors that are enjoying a boom. In the US, Scientific Beta observes, ESG strategies overweight technology stocks which have done well through the pandemic thanks to the stay-at-home economy.
Industry response
One thing is universally acknowledged, however. Asset managers are producing new funds to meet investor demand. 2020 was the year that “European sustainable funds broke new records” according to Morningstar.
The fund ratings group calculated net inflows of €233 billion during 2020, almost double the figure for 2019, with a whopping €100 billion pouring into responsible investment funds in the fourth quarter alone.
Despite this, investors are still seeking further innovation. Retail respondents to Research in Finance’s UK Responsible Investing Study called for a common language to be used across all funds, while institutional respondents said more work was required to assist in the understanding of impact investing.
To discover more about the UK Responsible Investing Study, click here.
