ESG funds - fit for future socially aware investors

  • 29th June 2020

ESG indices aim to go much further than simple financial concerns. They incorporate wider issues around the environment, society and governance ("ESG") as part of their investment and risk management processes.

As COVID-19 affects all our lives globally, one impact we are seeing is higher volatility in the financial markets with equities seeing on of their fastest sell-offs during Q1 2020.

During this period however we have seen MSCI ESG indices fall less than the wider market.

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

What are ESG funds?

ESG indices aim to go much further than simple financial concerns. They incorporate 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 displaying leading behaviours in managing ESG issues, or in companies operating particularly in sustainable areas such as renewable energy and healthcare. Other funds take on a negative approach through removing 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 under-performed over Q1 2020, and overweight to technology and financials, which performed moderately 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.

What about the future?

COVID-19 has fetched 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 bares 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.

If you would like to talk to our financial advisers about your investment strategy, do contact us for a no obligation consultation.

The above article is intended to be a topical commentary from the author, Parmenion, and should not be construed as financial advice from Forrester Boyd Wealth Management.

Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation. All investment carries risk and it is important you understand this. If you are in any doubt about whether an investment is suitable for you, please contact Forrester Boyd Wealth Management.

All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.