By Alastair Marsh
Fund managers that were touting the benefits of ESG investing before the coronavirus outbreak say the pandemic has only strengthened their convictions and the performance of sustainable portfolios should vindicate their strategy.
DWS and Insight Investment, which respectively oversee $834 billion and $820 billion of assets, are among the firms that say they’re not slowing their efforts to put environmental, social and governance issues at the core of their businesses even as the coronavirus outbreak causes untold economic damage. Allianz Global Investors, with $612 billion of assets under management, is doing a deep analysis to measure if ESG investments truly outperform.
Considering ESG issues alongside regular financial metrics when investing and lending had started to become standard practice in the finance industry before the global pandemic roiled markets. The panic selling that started in February is providing a test for investors’ commitment to environmental and social concerns.
“If our conviction is that ESG is important, then nothing should stand in the way,” said Joshua Kendall, senior ESG analyst at Insight in London. “If it’s not to be just a flash in the pan, then it doesn’t seem sensible to stop because of the virus.”
Insight, which is part of Bank of New York Mellon Corp., is ignoring advice from the Principles for Responsible Investment, the biggest network of responsible investment firms, of which it is a member. PRI says shareholders should now focus their engagements with companies on how they are responding to coronavirus.
Kendall said it would be a mistake to put everything on hold except Covid-19 as companies still need to hear from their investors on other long-term issues.
Insight encouraged a large emerging markets oil and gas company last month to set environmental objectives in advance of a possible sale of a so-called transition bond, Kendall said. Transition bonds are debt securities that finance projects aimed at helping the seller switch to a cleaner way of doing business. Insight also isn’t making changes to the objectives of its responsible investment team.
DWS isn’t scaling back its ambitions either, said Susana Penarrubia, the firm’s Frankfurt-based head of ESG integration. DWS is working to increase the degree to which ESG is embedded into each step of it investment process, she said.
“We are not shutting anything down in ESG,” said Penarrubia. “Everything you do on ESG integration is a years’ long thing. It doesn’t depend on the markets.”
The market convulsions of the past month are testing more than just ESG investors’ convictions as global economies grind to a halt to combat the coronavirus outbreak; they also may offer insights into whether environmentally- or socially-preferable investments stand out during tumultuous periods.
And with more than $30 trillion now managed using an ESG approach, the stakes are high and ESG managers want to prove its worth. So far the results are mixed with six of the 10 largest U.S.-based ESG mutual funds posting larger losses than the Standard & Poor’s 500 Index so far this year as of Friday.
Allianz Global Investors is currently engaged in a comprehensive analysis of whether ESG-focused portfolios outperformed traditional strategies during the recent market slump.
The past few weeks of “unprecedented market stress” provide the optimum opportunity to test the firm’s conviction that “actively managing extreme ESG investment risks contributes to deliver more robust portfolios,” said a company spokesman. “We would expect that ESG-risk managed portfolios translate into better risk-adjusted performance,” he said, adding the analysis is ongoing and will cover more than just 2020 data.
Data from Morningstar Inc. suggest Allianz may be proven. Chicago-based Morningstar found 24 of 26 ESG-tilted index funds outperformed their closest conventional counterparts in the first quarter.
Fixed income-focused Insight Investment also is analyzing performance. The manager is reviewing how the credits of better-ranked ESG companies performed in the market selloff, compared with ESG laggards, said Kendall.
“People now accept that ESG is important but what remains uncertain is what is the financial impact or performance of ESG,” he said.