How have ESG funds fared in recent months?

A universal shock, but differentiated outcomes

The COVID-19 pandemic is affecting all of us globally. One impact is higher volatility in financial markets, and equities saw one of their fastest ever sell-offs during Q1 2020.

During this period, however, MSCI ESG indices fell less than the broader market.

Chart showing higher volatility in financial markets in Q1 2020

Source: MSCI, “ESG Indexes during the coronavirus crisis”, 22 April 2020.

Before we look at why they have suffered less than the wider market, let’s clarify what we mean by ESG indices.

In general, ESG indices aim to go beyond simple financial concerns, and integrate wider issues around the environment, society and governance (“ESG”) as part of their investment and risk management processes.

This can be through a positive approach of investing in companies demonstrating leading behaviours in managing ESG issues, or in companies operating specifically in sustainable areas e.g. renewable power and healthcare. Other funds adopt a negative approach through screening out companies who derive a portion of their revenue and profits from areas such as tobacco, gambling and weapons, which some investors find contentious. The range of the negative screens varies, as does the degree of tolerance. The indices in the table above are primarily positive in their approach, though controversial weapons are broadly excluded.

The lesser impact of the sell off on ESG strategies in Q1 is partly explained by many being underweight sectors such as mining, energy and airlines, which underperformed over Q1 2020, and overweight to technology and financials, which performed relatively better. However, MSCI believe that underlying companies scoring strongly on ESG issues such as company culture, the strength of consumer relations and corporate governance, also played a part.

How have the Parmenion ethical portfolios performed?

Parmenion offers 4 ethical Profiles, PIM Strategic Ethical Active A, B, C and D, with 10 Risk Grades in each. The chart below shows the risk and return they have delivered over the past 5 years to 30 April 2020: risk goes up from left to right, performance from bottom to top. For ease of reading, only Risk Grades 3, 6 and 9 are included for each of the 4 ethical Profiles. Past performance is not an indication of future returns.

Chart showing how risk and return have performed in PIM Strategic Ethical Active A, B, C and D

Over this time period, the more positively engaged portfolios in ethical Profile A have performed better than the more negatively screened ethical Profile D portfolios and with lower volatility.

What about the future?

COVID-19 has brought various ESG factors to the forefront of people’s minds. Lockdown has visibly cleared pollution from skies and waterways. Concerns have been raised around how animals are kept, and used, given the zoonotic source of the coronavirus. Socially, the pandemic has exposed inequalities in workers’ health & safety, as well as job security, with businesses such as Sports Direct and Wetherspoons coming under fire. The pandemic also exposes the need for good governance and how this can go wrong – US airlines are now reliant on a $25bn bailout from the government, having paid out 96% of their free cashflow for share buybacks in the last decade (source: Bloomberg).

There is evidence that wider awareness of these issues is influencing investor behaviour, as Q1 2020 saw record global flows into ESG funds of $46bn, compared to outflows of $385bn for the overall fund universe (source: Morningstar). We believe that ESG funds are well placed to benefit from increasing opportunities in sustainable sectors, while helping drive positive change.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

Speak to us and find out how we can help your business thrive.