Facts & figures: ESG vs non ESG portfolios. How did they manage COVID-19 crisis?

Crisis periods like the current one due to COVID-19 increase uncertainty on markets and on asset manager’s decisions. 2020 has proved to be a year of great volatility on markets. In this context, ESG portfolios showed resiliency and the ability to deliver superior performances with lower volatility compared to non-ESG strategies. This is true for both bear markets (like the one in the IQ-2020), as well as for the positive rally occurred in Q2 .

After the dramatic drop in March, that will be remembered as one of the worst quarters for Wall Street since 2008, major markets recovered significantly. This resurgence has been driven mainly by the supportive policy measures implemented by central banks and governments, and led to the best quarter for stocks since 1998.

An ever-increasing number of portfolio managers includes ESG criteria in their investment process. Although socially responsible funds do not guarantee a positive financial performance, historical returns analysis has shown that a company particularly attentive to ESG criteria has a lower risk of incurring into frauds, scandals, sanctions and reputational damages. At the same time, the exposure to sustainable investment themes (e.g. circular economy, healthcare and well-being thematics, renewable energy, demography issues, social and Green Bonds), have been able to generate higher returns compared to non ESG-focused funds, both in the long term and during periods of high volatility like in 2020.

In this context, empirical evidence demonstrates that over the last three years (and especially in 2020), the main ESG global equities and bonds indexes have over-performed the corresponding non-EGS benchmarks. As an example, the MSCI World ESG Leaders index has outperformed the traditional MSCI World by +1,19% (and by +2.47% over the last 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 +0.20% in the same period (Source: Bloomberg, end of June 2020 data).


BOND ESG VS NON ESG INDEXES

The result of this over-performance is even more evident when comparing balanced funds’ results. In fact, sustainable funds were able to over-perform their historical non-sustainable competitors, while successfully limiting volatility and drawdowns during market corrections. Furthermore, their bull capture ratio is aligned to that of non-ESG funds, thus providing a very attractive risk-reward profile for investors. For example, some sustainable balanced funds succeeded (at the moment we are writing) to “bring back” YTD performances into positive territory, while most of their competitors and the whole peer group (represented by Morningstar categories “Balanced Prudent EUR”, currently at -2,86% on a YTD basis, and “Balanced Moderate EUR” at -3,72% YTD ) are still lagging behind (Source: Bloomberg data).


BALANCED ESG PORTFOLIO VS NON-ESG PORTFOLIO

Nevertheless, we should point out the necessity for investors to avoid selecting, within the huge ESG funds offer available, those asset managers which are just applying the so-called “green-washing”. In fact, the EU taxonomy on ESG investments will require asset managers to provide a concrete and comparable data-set of reporting documents to avoid incurring in those ones adopting a pure “window dressing” (meaning that their aim is just to include their funds into ESG screenings). De facto, this misleading approach is more the result of a mere “marketing” strategy, rather than a true commitment to sustainable investments.

With 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. Besides, it allows us to spot specific “green-washing” attempts.

The current market environment and COVID-19 crisis proved to be a successful test for the ESG investment approach. During the first semester the returns of sustainable balanced funds ranked in their category’s best quartile. The main reason is attributable to the fact that these funds has benefitted from their ESG screenings and analysis. Eventually, these funds proved to be more resilient during market corrections, while taking advantage of the later market uptrend. Major ESG asset managers delivered superior risk/adjusted returns, with limited maximum drawdowns and a positive capture ratio.

Gianluca D’Alessio,

Senior Portfolio Manager at GreenEthica by FIA A.M.