Impact-oriented companies as well as companies with better ESG ratings had better returns in almost every month of 2020 (Fidelity International, 2020). This sets up the most effective evidence in favour of sustainable investing to date. Consequently, we see how impact investing takes the spotlight on the global markets.
Proving sustainability
Consider the first six months of this year, when Covid-19 caused great turmoil on the investment markets. Stock prices have signalled the severity of the crisis before much of the world had any understanding of the tectonic shift to come. In late March, in the course of just one month, the global flagship market index Dow Jones Industrial Average fell by over 34 per cent. The economists worldwide were nervously anticipating what’s to come.
Over this period, the key global market indices have been beaten by their subordinal ESG counterparts, including S&P 500 ESG, AC Asia ESG leaders index, MSCI’s emerging markets ESG leaders index and others.
What’s even more impressive, Blackrock claims that 88 per cent of its global sustainable index selection outperformed their non-sustainable peers over the same period. “Open-ended funds that score in the top 10 per cent on Morningstar’s sustainability ratings, significantly outperformed low-scoring peers,” it says in one of the recent reports (Blackrock, 2020).
Market figures for 2020 show that companies with top ESG scores outperformed those with weaker ESG indicators in every month of 2020, apart from April, when ESG stocks rose less sharply. This suggests that ESG stocks are less volatile – a high quality indicator.
This is good news. For impact investing to progress and become the ‘norm’, it will have to break free of the trade-off myth. Now sustainable companies will need to continuously reward its investors with outstanding returns to keep up the right pace.
How about the big financial whales?
Institutional investors are still the key driver behind the sustainable shift in investing. To illustrate the paradigm change throughout 2020, we can follow how the public statements of the $7 trillion asset manager BlackRock went from “we are on the edge of a fundamental reshaping of finance” (Larry Fink’s Letter to CEOs, 2020) to “we make impact central to our investment strategy in 2021” (2021 Stewardship Expectations by Blackrock). While importance of impact has been progressively recognized in the last years, only in 2020 we see how sustainability takes spotlight in the global agenda – from hypothetical “near future” to a very specific “2021″.
Impact will not lose spotlight in institutional agenda anytime soon. Always wrapped in lofty statements, the shift towards sustainable finance is frequently very pragmatic: front-running the market regulation and laws or keeping up with growing market demand.
Popular demand accelerates
ESG activism gathers momentum just as well on the retail side. Almost two-thirds of families regard sustainable investing as important for their legacies, and 39 per cent of family offices intend their portfolios to be sustainable in five years’ time (UBS, 2020).
Experts attribute the retail’s sustainable shift to generational change. They believe that millennials are more concerned with ESG issues than the previous generations. In 2020, 64 per cent of millennials are likely to make investment decisions based on societal problems that are important to them (compared with 54 per cent of Gen Xers and 42 per cent of boomers, Allianz group). The retail shift towards impact investing is far from its tipping point, as the intergenerational wealth transfer continues.
On the one hand, the worse ESG issues get, the more demand for conscious solutions grows. In 2020, the retail interest in impact finance was fuelled by the unequal distribution of COVID’s damage and the glaring social issues it had revealed. Ongoing discussions on the wide spectrum of pandemic-related social issues have pushed the focus from climate change to social and community issues. Now we expect that many new and exciting socially-themed investment products will appear in 2021.
Conclusion
While some investment fads come and go, the trends driving the need for sustainable business practices are here for the long-term. We can see how the systemic shift is driven on many levels – by the regulators, financial companies and the retail investors. The hard evidence from 2020 will now support the ESG investment case as well.
References:
1. Fidelity. “Putting Sustainability to Test”.
2. Blackrock International.
3. UBS. “Global Family Office Report 2020”.
4. Allianz Group. “Socially Responsible Investing and ESG”.
