The historic volatility of the first four months of 2020 have left companies across all industries and most countries reeling.

It has also temporarily turned the world's attention from talk of climate change, something that was gaining more traction across 2019 and into the beginning of this year as forest fires devastated large tracts of Australian forest and UK experienced major flooding. 

As Covid-19 has spread, unemployment rates have surged, people stop travelling and households stop buying much except for essential goods. That has caused the stocks and bond prices of thousands of companies to plummet, only to patchily recover some of this ground in recent weeks.

These market ebbs and flows have offered unique conditions with which to assess the effectiveness of environmental, social and governance (ESG) funds and investment strategies. ESG has gained traction among climate change-conscious institutional investors in recent years, and that has led fund managers to roll out more such investment strategies.

Indeed, fund research house Morningstar estimated that mutual funds and exchange-traded funds with a focus on sustainability gained $20.6 billion of total new assets in 2019, nearly four times higher than the amount recorded the previous year. 

Proponents have long claimed that ESG can offer a useful measure of how well run companies are, how forward thinking and sensitive to the needs of their employees and climate change. And some research companies have claimed to see signs of such strategies doing so, at least during the earlier stages of the pandemic. 

We asked five experts whether there is demonstrable evidence that assets with strong ESG scores did better than their lower ranked peers during such unprecedented market dislocation. 

The below comments have been edited for clarity and brevity.

Gabriel Wilson-Otto

Gabriel Wilson-Otto, head of stewardship Asia-Pacific
BNP Paribas Asset Management

Globally, the data that I have seen is encouraging. In the first quarter of 2020, the four MSCI ACWI ESG indexes outperformed the underlying MSCI ACWI index by between 70 basis points (bp) and 290bp. This outcome was also supported by analysis from Morningstar, of sustainable funds in the US funds during the first quarter of 2020 - 44% had top quartile performance versus peers. 

A potential contributor to this outperformance is the link between sustainable investment practices and business resilience – integrating environmental, social and governance considerations into strategic planning can help identify, and potentially mitigate, a broader range of risks and opportunities facing a company.

In addition to strong share price performance, Sustainable or ESG investments have also seen strong inflows. In the US, the first quarter was a record quarter for inflows into sustainable ETFs, and in Asia Ex-Japan ESG assets rose 21% in the first quarter of the year despite the market decline. 

More broadly this is consistent with an enhanced consumer focus on corporate behaviour during the crisis and evidence of shifting investor and consumer expectations for companies. I would argue that today, bad actors face a growing risk of threats to both market share and attracting and retaining top talent. We believe that companies and investors can both ‘do good’ and ‘do well’.

Jessica Huang, head of Americas and Asia Pacific platform strategy and innovation
BlackRock Sustainable Investing

Jessica Huang

The recent downturn has been a key test of our conviction that companies with strong profiles on material sustainability issues have potential to outperform those with poor profiles.

Both BlackRock and Morningstar research have found that the sustainable investing strategies have proven more resilient amid uncertainty, with outperformance driven by a range of material sustainability characteristics, including robust corporate culture, job satisfaction of employees, the strength of customer relations, or the effectiveness of the company’s board during Covid-19.

To test this, we analysed performance differences between ESG indices and their core, non-ESG, versions, as well as ESG-managed funds versus their peers, and found that the majority of ESG-tilted portfolios have outperformed their non-sustainable counterparts during this year’s market downturn.

In addition to the index performance, we also found that open-ended funds that score in the top 10% on Morningstar’s sustainability ratings have significantly outperformed low-scoring peers (the bottom 10%).

Importantly, the resilience in sustainable assets is more than just sustainable funds underweighting the energy sector. We also found that companies with better sustainability characteristics within the energy sector and sub-sectors such as integrated oil and gas are more likely to outperform during January 1 to May 1.

Jenn-Hui Tan, global head of stewardship and sustainable investing
Fidelity International

Jenn-Hui Tan

There is clear evidence that incorporating ESG considerations in a fundamental research process is helping investors to select better performing public market assets. In our view, this is because issuers exhibiting superior sustainability characteristics will have more prudent and conservative management teams and therefore greater resilience in a market crisis.

Fidelity recently conducted a survey using its proprietary ESG ratings covering more than 2,600 companies. We found a strong positive correlation between a company’s relative outperformance and its ESG rating over this period of volatility. The equity and fixed income securities of companies at the top of our ESG rating scale outperformed S&P 500 and those with average and weaker ratings underperformed, with an average of 2.8% of stock performance between those three levels.

The pandemic has also emphasised the broader societal responsibility of companies. Over the responses to our latest pulse survey of 146 Fidelity analysts indicated that companies will step up their focus on workers, consumers and the wider community as a direct result.

In the short term, this has taken the form of a focus on employee safety and prioritisation of society’s immediate needs, such as broadband access, public hygiene initiatives and the manufacturing of healthcare equipment. In the longer term, we anticipate an effort to improve employee satisfaction with better conditions and in some cases, higher pay, accelerating the broader shift towards stakeholder capitalism.

Olivia Albrecht, head of ESG business strategy
Pimco

Olivia Albrecht

As the sustainable investment industry – and ESG research specifically – have advanced over the past decade, markets have provided limited opportunity to observe how ESG funds or issuers with different ESG scores would perform during periods of market stress. However, the volatility of 2020 provided such an opportunity.

As a humanitarian and economic crisis, Covid-19 and the global pandemic will have lasting effects on how people work and how businesses operate for years to come. Recently, environmental factors in ESG research captured the attention of investors; however, we see social factors moving up in terms of prioritisation.

From a fund perspective, in the first quarter, more sustainable fixed-income funds were represented in the top quartiles and top halves of their peer groups versus non-sustainable funds, according to Morningstar.

From a company-specific perspective, we believe bottom-up ESG research helps avoid significant down-side risk, for example like risks we have observed in the energy markets. In-depth research likely also helps identify high quality management teams able to value and manage critical factors such as human capital, consumer trust, product safety, supply chain, and operating efficiency.

Bonnie Wongtrakool, global head of ESG investments
Western Asset Management

Bonnie Wongtrakool

Interest in sustainable investing has accelerated in recent years, with a growing number of investors integrating ESG in search of better risk-adjusted returns. Last quarter, when assets repriced at a shocking velocity, the ESG investment thesis faced its first true market test.  During this volatile period, ESG-focused strategies indeed lived up to expectations, as corporate bond issuers with higher and improving MSCI ESG ratings outperformed their industry peers.

While supportive of the overall investment rationale for ESG, the pandemic has highlighted the materiality of social factors in particular, which are now viewed as essential rather than merely “nice to have.”  Academic research shows that issuers signalling positive employee and supply chain practices also outperformed their competitors during the downturn earlier this year.

Alongside rising investor demand, ESG bond issuance has started to pick up again after a lull in the first quarter. Social bond growth has recently outpaced that of green bonds due to Covid-19 concerns, but we are seeing issuance in the latter pick up as market conditions stabilise and are actively allocating to corporate names that we favour in the primary market.