A Surge in Demand beyond Traditional ESG Funds

Written by Tara Ford

3 min read

Background

ESG incorporation is (1) applying a measure of Environmental, Social, and Governance criteria in investment analysis and portfolio selection and or (2) taking into consideration shareholders’ concerns over ESG issues during decision-making processes. 

Because socially conscious investing took off during the longest bull record in history, many still wonder if this trend will continue. However, the record capital inflow towards sustainable focused funds proves that this investment strategy is here to stay. And reaffirming proof that companies with below-average ESG scores have seen larger downward EPS revisions this year, while Morgan Stanley found that years with economic turmoil, like in 2008, 2009, and 2018, sustainable funds downside risk was much smaller than traditional funds. 

Are companies and investors still focused on ESG issues despite the world’s recent shift in focus? 

With today’s rising concerns of unemployment and healthcare, some worry that ESG issues may be taking a backseat. But the virus inducing economic decline has stripped back the corporate curtains and accelerated the demand for corporate transparency, and stakeholder accountability. In the past “E” for Environmental was arguably the star player of ESG incorporation, however, Social and Governance have also stepped up to the plate, in part due to the pandemic’s altering of society’s values. We’ve already seen, for example, massive capital inflows of US-listed sustainable funds rising by 42% from 2018 to the beginning of 2020. As apart of the trend on December 1, 2020, NASDAQ began discussions with the SEC to require “all company boards to have at least one woman and one director who self identifies as an underrepresented minority or L.G.B.T.Q.” This was brought up after NASDAQ found that more than 75% of its total listed companies did not meet its proposed diversity requirements. In regards to risk, the Carlyle Group found that companies they invested in that also had at least two board members of diversity have approximately 12% more earnings growth per year on average versus companies that lack diversity. Therefore, companies will either seek to make changes within their company’s corporate body or explain why they have chosen not to comply towards NASDAQ’s requirement. It’s clear that the pandemic has shifted the priority of issues and funds, but now the question remains on whether the rise in socially responsible investing is here to stay?

Sustainable investing has been around for decades, but the ESG fund boom has only really spiked in the last five years, so this is the first time we are seeing ESG related funds put to the test during a market downturn. Funds like Nuveen ESG Large-Cap Growth ETF have returned 10% this year in comparison to the S&P 500 which is roughly down 1%. Although this result is over a short time frame, many ESG related funds have outperformed their benchmarks in more than one year. 

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