ESG funds withstand economic turbulence from pandemic


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Environmental, social and governance (ESG) investing and funds that integrate ESG investing strategies are proving resilient during the extreme market and economic turbulence that has occurred with the coronavirus pandemic.

According to recent research from Rainmaker Information (which publishes Money and The Sustainability Report), if a superannuation fund member invested in general balanced or growth super fund options they would have been 1.5% better off over the 12-months to end March if they chose ESG balanced or growth options. The ESG effect over the quarter would have been 1%. This reinforces the view that ESG funds seemed to have withstood the onslaught of the coronavirus financial crisis better than non-ESG funds, according to Alex Dunnin, executive director of research at Rainmaker Information.

Further, Rainmaker research found that Australian Ethical was "one of just three MySuper products to deliver positive 12-month returns to end March", and the fossil-fuel free Future Super is the top personal balanced option also with a positive result. Four of the top five personal balanced options are ESG options. In retirement balanced ESG options made up four of the five too.

coronavirus esg super funds returns

This data from Rainmaker matches observations from other corners of the investment world. Research from Mercer research suggests that fund managers that integrate ESG into its portfolio process are also faring better overall.

In a recent webinar, Mercer partner and global business leader of responsible investment Helga Birgden noted that COVID-19 demonstrates what a systemic shock experience is like and how well prepared investors are to respond to those systemic shocks.

Birgden confirmed that there is an emerging trend of outperformance in comparison to other fund management styles.

"In the short term there is ESG performance outperformance emerging during COVID-19, in part because highly rated ESG firms are more likely to be in those less cyclical sectors such as tech, healthcare, consumer non-durables, and tend to have less exposure to the energy stocks," Birgden says.

This corresponds with research from fund managers.

Global fund manager AXA Investment Managers found that companies with higher ESG ratings performed "notably better" and showed better resilience during the outbreak of the coronavirus pandemic compared to investments with lower resilience. AXA IM's research shows that ESG leaders outperformed ESG laggards by 16.8% in the first quarter of 2020.

The performance of ESG funds has perhaps influenced positive news around inflows. Morningstar has published its first-ever Global Sustainable Fund Flows report, and found that in the first quarter of 2020, we found that the global sustainable fund universe collected inflows of USD $45.6 billion, compared with outflows of USD $384.7 billion for the overall fund universe

Those global trends were reinforced here, too. Australasian sustainable funds saw US$319 million in new inflows in the first quarter of 2020, according to Morningstar. The inflows were split between active and passive strategies, and Russell Investments and Australian Ethical "accounted for most of the inflows for the quarter", Morningstar says.

"Growth was split between active and passive strategies, and that's a positive side," says Grant Kennaway, director of manager research at Morningstar. "On the passive side, we see funds from State Street, Russell and global players offering passive products, which is a healthy sign for the market."

However, supply of new ESG funds is lagging in Australia, Kennaway adds. While Europe and the U.S. saw 102 new funds launching in the first quarter of 20202, up from 85 new funds launched in the first quarter of 2019, no new sustainable funds were launched in Australia or New Zealand in the first quarter of 2020.

"Australia is behind other regions," Kennaway says. "What I would say is that we're seeing more strategies that are not ESG strategies, but they are talking about more openness to ESG factors being part of the research process. That's a subtle distinction, so you're talking more mainstream strategies that are talking about sustainability."

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Rachel Alembakis is the Managing Editor of FS Sustainability, a Rainmaker title that examines how investors and companies integrate environmental, social and corporate governance issues into their decision-making processes. She has more than a decade's experience covering investment issues for a range of publications in Australia and overseas.

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