Many institutional investors are taking a second glance at their portfolios to help ensure they are set up to withstand market downturns. Nonprofits in particular are considering sustainable investment strategies for their portfolio. But given the current environment, has ESG/sustainable investing slowed down?
I sat down with our resident ESG expert, Jana Holt, to weigh in, and she explained, it’s quite the opposite. In fact, these investment strategies are continuing to accelerate at record levels. When we consider the range of options available to meet financial goals and objectives, ESG/sustainable investing may make sense for many investors.
Here are three key reasons why.
- Long-term orientation
Many companies that perform well on environmental, social and governance dimensions take a long-term view of management and business strategy – operating efficiently, investing in people and managing capital responsibly. Many investors view sustainability as a risk management strategy, considering how these practices may create stability over long time horizons. The idea is that in a crisis, they may be well positioned to weather the storm.
- Industry dynamics
This particular crisis hit some industries harder than others – travel and leisure, energy to name a few. These are sectors that tend to be underweight in many sustainability-oriented investment strategies. Meanwhile asset-light businesses, like tech, tend to be overweight. These sectors have seen significant tailwinds as more and more people work, learn, shop and socialize online.*
- Company responses
There’s some interesting research linking how companies are responding to the crisis (employee safety measures, workforce retention, etc) to outperformance in the market. Correlation is not causation, but companies that are taking a broad view of their stakeholders have fared well. For example, Just Capital sorted the 100 largest companies based on their response to COVID-19. The top quartile outperformed the bottom quartile by a wide margin. Similarly, State Street and Harvard put out a study based on sentiment data and found companies with meaningful, positive response outperformed those who focused on non-salient issues or whose responses were received poorly.
Taken together, these factors may be contributing to positive results for sustainable funds across geographic markets and asset classes. Many data providers and managers have put out research to this effect over the past few months. For example, Morningstar evaluated the performance of more than 200 U.S.-domiciled “sustainable” equity funds during the first two quarters of 2020 and found that 72% performed in the top half of their peer group, and 43% in the top quartile.
Meanwhile, assets have continued to flow into sustainable strategies at record rates. We see that interest echoed by our nonprofit clients. Particularly in the higher-ed space, there are multiple advocates, ranging from students to faculty, board members and alumni. In the university space, we’ve also seen schools continue to commit to sustainable investing, even as their campuses grapple with how to educate students remotely, reopen safely and maintain their endowments for the future.
If you have any questions or would like to discuss strategies for incorporating sustainable investing into your portfolio, please feel free to contact me.
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Environmental, social and governance (ESG) guidelines may cause a manager to make or avoid certain investment decisions when it may be disadvantageous to do so. This means that these investments may underperform other similar investments that do not consider ESG guidelines when making investment decisions.
Information provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company. Investing involves risk including possible loss of principal. There can be no assurance that your investment objectives will be achieved.