Facts & Figures: ESG Vs Non ESG Portfolios

In 2020, ESG strategies generally have performed relatively well and record flows into ESG funds have followed. The pandemic has acted as the turning point in ESG investing. Investors will continue to put money into companies that responded to the coronavirus crisis by focusing on long-term goals rather than looking for near-term profit at all costs.

Crises often trigger irrational behaviors from investors shifting their focus towards short-term goals that don’t always coincide with their long-term plans. The economic uncertainties reinforce risk aversion setting off the flight-to-quality phenomenon. This pandemic is no exception. The volatility in the global financial markets left investors scrambling for higher quality and less risky assets. This holds true for ESG investing. The primary driver of doing ESG is risk mitigation and COVID-19 pushed environmental and societal issues higher up in the risk spectrum. Parallels have been drawn between risks of a pandemic and issues such as biodiversity and climate change. “The pandemic crisis expands the conversations around ESG and reinforces its importance” (Source : Michael A. Gayed, CFA – Seeking Alpha)

In this context, over the last three years (and especially in 2020), the main ESG global equities and bonds indexes have outperformed the corresponding non-EGS benchmarks. As an example, the MSCI World SRI EUR index has outperformed the traditional MSCI World EUR by 5.38% over one year (and by 12.19% over three years), while the Bloomberg Barclays MSCI Global Aggregate ESG TR Index has beaten the equivalent non-ESG index (the well-known Bloomberg Barclays Global Aggregate TR Index, generally considered as “the” bond benchmark for bond portfolio managers) by 0.06% over one year (and by 0.08% over 3 years). (Source: Bloomberg, end of September 2020 data).

Going deeper into the ESG fixed income asset class, given this very low (or negative) rate environment, outperformance might be found within the Thematic ESG area, and more precisely within the “Green Bonds”.

Green bonds are designed to help the environment by directing portions of the capital raised to projects related to clean water, renewable energy, energy efficiency, river and habitat restoration, or mitigation of climate change impacts. These relatively new bonds are increasing in popularity with investors at an exponential rate. Green bond issuance for 2019 was $254 billion—the first recognized green bond was issued in 2008.

What is interesting about this sub asset class is that beside attracting more and more investors, it recently tended to outperform the market.  As of 30/09/2020, the Bloomberg Barclays MSCI Global Green Bond Index outperformed the Bloomberg Barclays MSCI Global ESG Index by 1.54% YTD and by 1.66% over one year. The reasons for this outperformance are multiple:

First of all, issuers of green bonds have historically been large, stable and forward-looking entities, with established governance structures. These entities are possibly better equipped to withstand a crisis, regardless of their “greenness.”  Secondly, green bonds are rarely issued by oil companies, which were the ones hit hard in both of the last two crises. Thirdly, green bond investors have historically included a large share of long-term investors, such as pension funds and insurance companies, which are unlikely to move from green investments in a crisis (they are sometimes referred to as “hold-to-maturity” investors). Finally, dedicated green bond funds provide additional demand that, all-things-equal, should provide a better cushion for sell-offs. (Ebba Ramel & Jacob Michaelsen, Open Insights by Nordea).

However, and this is important, the Green Bonds market is still a nascent but growing market, and tends to be quickly oversubscribed, which makes new investments in this sub asset class  struggling. That is why you will unlikely see them massively represented in portfolios at the moment.

In conclusion,  ESG investing is one of the fastest-growing areas of asset management, but unfortunately few investors of fund providers can agree on a definition! There have been many competing attempts by different companies to create ESG ratings, creating an almost impenetrable jungle of different methodologies, ideas and approaches. Whether clients want to match investments with their mission or pursue enhancing long-term performance, ESG investing can help meet their goals. And for advisers, it represents an attractive opportunity to position practices for continued success in the future. Sustainable investing has grown rapidly in recent years, with more than $30 trillion of assets worldwide now incorporating some level of ESG consideration. Investors have piled into ESG because they’re under pressure from clients, employees and the public to contribute to a fairer and greener society, and because there’s a growing recognition that “non-financial ESG risks can have a material impact on risk-adjusted returns,” the OECD said, singling out the coronavirus as a case in point.

In this regard, GreenEthica by FIA Asset Management has developed an internal proprietary ESG scoring system applied to fund managers: it is based on the ESG analysis adopted within their investment processes, as well as its “weight” for the final decision on investments. The fund analysis is extremely accurate, since both qualitative and quantitative parameters are considered, and systematically completed with the fund manager’s interview to challenge his approach. Besides, it allows to spot specific “green-washing” attempts and not to rely on external providers ‘analysis, sometimes divergent among them.. Consequently, our Selectra Best of SRI UCIT fund has produced very attractive returns, outperforming the MSCI World SRI Index EUR by 2.93% and the MSCI world Index EUR by 8,96% year-to-date.

By CHARLES LAMOULEN , Head of Portfolio Management at GreenEthica by FIA AM and CHRISTOPHE BOGAERT, Portfolio Manager at GreenEthica by FIA AM