Sustainability themes and ESG integration hold up defensively relative to peer strategies

Renewables infra tops performers this year as bear market bites

Investors allocating to renewable energy infrastructure have been relatively shielded from the market shock, experiencing the shallowest fall of -3.2% between Jan 31 and March 13, according to sectors assessed by the UK’s Association of Investment Companies (AIC).

Notably, it said returns on renewables infra held up over non-renewables infra, which slid -8.6% over the same time period.

The AIC represents UK investment trusts and other closed-ended investment companies worth £196 billion.

As markets tumble, it said the average investment company had fallen 16% over the last six weeks. 

In the top five performing sectors, Debt – Direct Lending came second (-4.4%), followed by Growth Capital which lost 5.8%. In fourth spot came Hedge Funds (-7.2%) and then Infrastructure.

Annabel Brodie-Smith, Communications Director of the AIC, said: “Renewable Energy has been in strong demand for its high yields and the underlying assets of these investment companies such as wind farms, solar parks and energy storage have a lower correlation to the wider stock market.” 

The news follows interesting data on the relative defensive performance of sustainability indices and funds more broadly in the market crisis.

MSCI, one of the world’s biggest index companies, today (March 19) said its defensive factor and ESG indexes in equities and fixed income had outperformed their respective parent indexes in the recent sell-off, due to a mix of incorporating lower risk, higher quality and higher ESG rated companies.

In recent days, MSCI also urged all investors globally to integrate ESG into investment.

The index giant said in a new set of Principles of Sustainable Investing that: “There should not be specialized “ESG Investing” on one side and “Non-ESG Investing” everywhere else. ESG integration is a transitional step to full incorporation of ESG considerations embedded as a core component of standard security selection, portfolio construction and risk management practices. We believe this is a permanent change to how investment strategies will be constructed and how investments will be allocated and managed.”

Morningstar data also backs up the relative defensive strength of ESG equity funds and indices in a bear market.

Jon Hale, Head of Sustainability Research at Morningstar, which is a major shareholder in Sustainalytics, the ESG data company, said that in the month to March, the returns of 66% of US sustainable equity funds – net of fees – ranked in the top halves of their respective categories. More than a third (39%), ranked in their category's best quartile, while only 11% ranked in their category's worst quartile. 

Hale said: “That means sustainable funds were over-represented in the top quartiles and top halves of their peer groups, because, by definition, 25% of all funds in each category place in each of four quartiles.”

For the year to March 12, he said the relative outperformance was even better. The returns of 69% of sustainable equity funds ranked in top halves of their respective categories. The returns of 42% ranked in their category’s top quartile while only 12% landed in their category’s worst quartile.

Hale also compared the returns of 26 ESG index funds with those of conventional index funds covering US stocks, non-US developed-market stocks, and emerging-markets stocks. Over the last month, 24 of the 26 outperformed conventional index funds, and all 26 outperformed for the year to March 12.

ESG indexes outside of the US performed even better. All 11 passive ESG funds in the Morningstar Foreign Large Blend category outperformed the iShares Core MSCI EAFE ETF (IEFA) for the month ending March 12. While IEFA lost 26.81%, the average ESG passive fund return was -25.93%. 

For the year through March 12, all 11 ESG index funds (-25.31%) are outperforming IEFA (-26.73%).

Separately, Morningstar said the sustainable funds universe in the US grew to 303 open-end and exchange-traded funds in 2019, up from 270 the year before. According to its 2019 Sustainable Funds U.S. Landscape Report, the longer-term growth has been dramatic, with the universe totalling just 111 funds at the end of 2014.