Investing based on environmental, social and governance factors could hit the mainstream after passing what Indosuez Wealth Management's global chief economist called the «ultimate stress test», in a conversation with finews.asia.
«There is a misconception in the markets that investments with an ESG (environment, social, governance) or sustainable orientation generally tend to underperform, compared to regular investments,» said Indosuez' Marie Owens Thomsen to finews.asia. «This was proven wrong in March and April this year when the global stock market suffered one of the biggest shocks of all time.»
The ESG version of the S&P 500 index outperformed the main benchmark by 2.7 percent since April 2019. The «Dow Jones Sustainability World Composite» and the «MSCI World ESG Leaders» also beat their renowned index counterparts by 3.8 percent and 1.3 percent, respectively, year-to-date. What’s more, much of the outperformance was not generated through the effects of increased global liquidity but during the turbulent periods of March and April.
«This episode could represent the ultimate stress test, attracting all types of investors to ESG-type strategies, bringing the segment definitively into the mainstream.»
Voting with their Feet
Investors have responded in similar fashion to the observations with ESG-oriented investment funds attracting inflows of $45.6 billion in the first quarter of 2020 compared to $284.7 billion outflows from all other funds, according to Morningstar data. The latter suffered an 18 percent drop compared to the 12 percent decrease of the former fund category.
«From this, it can be seen that investors voted with their feet and collectively determined this outcome,» Thomsen said.
«If this trend were to continue, the Covid-19 crisis could potentially be the key event that anchors sustainable finance as a performance factor as well as downward protection of investment portfolios in general.»
Asia Opportunity
Despite the relative nascency of ESG investing in Asia compared to other regions, receptiveness is improving. A survey by NMG Consulting said that 67 percent of asset owners in the region consider ESG an important component in the investment process and 71 percent are investing to improve their ESG knowledge and investment capabilities.
The region has long been known to grapple with the trade-off between ethical considerations and returns but over the past three years, 68 percent of APAC investors claimed that their ESG-based investments outperformed their regular ones. And the market has responded strongly with $1 billion of registered inflows into Asia’s ESG funds in the first quarter of this year alone.
Hubs like Hong Kong and Singapore are noteworthy for developing regulatory frameworks to support the growth of sustainable investing especially with regards to green finance.
«Future Winners»
At $26 trillion across all asset classes, ESG-oriented investments in Europe and the U.S. still represent just a fraction of the world’s stock market capitalization at $90 trillion. This allows for a still untapped market with ample opportunity which Deloitte reckons could represent 50 percent of all investments by 2025.
«To achieve this, progress would have to be made in terms of standardizing ESG data as well as strengthening regulation pertaining to, for instance, reporting requirements for all firms,» Thomsen said. adding that only 35 percent of the data currently used for ESG assessments are provided on a voluntarily by the listed company itself.
«All said, the future winners will in high probability be those who communicate best on these factors concerning companies, and those who know best how to collect and use quality data on sustainable and responsible investment themes on the investor side.»
