Sustainable portfolios can perform impressively even in testing conditionsby Paul Wallace / April 1, 2020 / Leave a comment
Bear markets test not just the resolve of investors but the performance of favoured investing strategies. Before the recent slump in share prices prompted by coronavirus, sustainable investing was in vogue. Does the green approach still make sense now that trading screens have turned red?
Sustainable investment means in practice the use of ESG (environmental, social and governance) criteria in investing, especially in equities. This was once a minority pursuit owing to concerns that green virtue might pay a price in lower returns. But in recent years it has won new fans in high places. In early 2019 BlackRock, the world’s biggest asset manager, said: “We have arrived at a ‘why not?’ moment in sustainable investing.”
That revelation was based on in-house research showing that the performance of ESG portfolios since 2012 matched or exceeded traditional ones. Returns in both developed and emerging markets were as good or better for the same amount of risk. An IMF study in October found broadly comparable performance between sustainable and mainstream global equity funds, showing that at any rate ESG investors did not pay a price for their principles.
These findings emerged as equities continued to march ahead in the bull market that started in 2009. But that long progression, underwritten by confidence that central banks were underpinning asset prices, has ended. The slump in share prices that started in late February has overwhelmed central banks’ interventions with the swiftest-ever descent into a bear market (when prices fall at least 20 per cent below their high). The test for sustainable investment is an exacting one. How has the strategy fared in precipitously falling stock markets rather than rising ones?
Sustainable funds have not been spared a battering. But analysis covering the period between 13th February and 12th March from Morningstar, an American investment research firm, found that ESG index funds outperformed mainstream equity benchmarks in the US, other developed markets and emerging markets. The margin was admittedly slim—for developed markets outside the US, an average decline of 25.9 per cent against a benchmark fall of 26.8 per cent—but on the right side of the scales.
Sustainable investing still has sceptics who doubt the meaning of ESG scores. These scores differ from familiar credit ratings provided by agencies such as Standard &…