Are Ethical Investments Outperforming Traditional Funds?
Ethics comes first: here’s why
This is the question posed by many investors who are looking for something to invest their money in right now. Aren’t ethical investments just another fancy trend that isn’t really so profitable for investments? Well, I did a little research to find out.
The difference between ESG and traditional funds
Solar and other renewable forms of energy caught my eyes after the oil prices dropped to negative during COVID-19 lockdown. While green movements are taking new heights, I see ESG investments (Environmental, Social, Governance) are becoming more and more trendy. Invest it and forget it — becomes the new normal in investing. Most of these ethical investing funds are designed for a longer perspective of 10 years or more. They let my money work safely while I’m sleeping.
Why shall I bother to surf stock markets every morning? Portfolio management teams select the portfolio asset classes with social and environmental impact taking into account the financial return indeed. So, by giving my preference to ESG investing, I mostly input long money into those areas which need sustainable resources for development as I’m sure my money will pay off in the long run. I also feel happy to see the positive impact on the green economy.
You wonder whether you have some free funds for investing or not? Just a hint- pension funds also offer you a certain set of ESG fund lists to choose from. ESG is a vehicle to make you a part of a big change globally even with your small or large investment. For example, hedge funds are currently bullish investing in Africa’s solar farms, as two-third of the Sub-Saharan population is still deprived of electricity there. In the long run, this investment will provide huge returns taking into account 300+ sunny days per year in most countries there.
Is ESG ahead of traditional funds?
The latest trend of ESG impact investing started in 2016 with ETFs and open-end funds. Passive funds run by balanced and professional managers take the lion share of investment flows around 70% as of 2019 data. As a safe haven for investors backed and overviewed by the states, large pension funds also fuel these assets. This gives them a certain level of flexibility and liquidity once the company needs big money for a large project.
Summarizing the reporting year data of 2019, I’ve seen record ESG fund flows. Annual fresh flow into sustainable funds is estimated to be $16B with the potential to double each next year. However, I can also consider the funds which converted to ESG strategies and it’ll increase the number 10-fold.
My research revealed that ethical fund investors outperformed traditional funds. So more investors, especially those seeking investment advice or new investing opportunities turn to impact investing to utilize their free cash flow.
I always check Morningstar data and found out that the MSCI World stock index fell by 14.5% in March, while 62% of large-cap equity funds with ESG principles outperformed the global tracker.
Why is this happening?
Based on my investment experience and talks to large investors, I can assure that ESG investors are more broadly involved in the management of the companies as they are genuinely interested in the areas they invest in. Sharing their diverse background with the executives at the Company is another leverage for success of those companies.
Tax-exempt programs or tax incentives, e.g. to prevent climate change, are another core element setting ESG investments in the privileged light. Some vivid examples to highlight here. Quite recently Amazon CEO Jeff Bezos has pledged $10 billion to combat climate change. Unilever has announced to invest €1 billion over the coming decade in green projects to improve the health of the planet to reach the zero-emissions target, as well. Visa announced it was operating only on renewable electricity. This trend shows the early signs of ESG investing absorbing more flow of free money into it.
If you are a kind of a person who doesn’t like day trading and you want to invest in the projects you believe in, the ESG is the right choice to go for. The fluctuation is rather moderate here, as the majority of ethical funds are not prone to selling off. They initially invested with the long-term vision. So this helps the investors to feel secure about their long-term passive income.
BNP — Drivers for ESG Integration
How did the Covid-19 pandemic affect this trend?
As dolphins returned to the shores amid the Covid-19 pandemic and with less pollution due to stay-at-home rules in place, I selected the sectors which showed a good rise. Digital products, automation, and diagnostics stocks were among my favorite picks with their soaring prices.
Next, as a consumers, we started giving more preference to eco-friendly, organic-grown, or GMO-free goods as many had to switch to home food and cooking. Thus the companies which offer such labels felt tangible gains in their sales year on year basis. This is another class of assets to go for.
What else is going on in the world of investing amid the COVID-19 pandemic? Conscious population is consistently switching the meter apps on their mobiles to measure the air quality and can especially consider this factor decisive while choosing their next travel destination. Air quality has been in the focus of the recent global summits. So affluent societies will offer a large number of grants to such initiatives to develop new know-hows for the cleanness of sea waters or saving energy consumption to save resources and have less air pollution.
Morningstar statistics data shows funds that made ESG investments attracted net inflows of $71.1bn globally between April and June 2020. Every next quarter I see the acceleration of this trend.
Future Outlook
In September 2020 Vanguard one of the largest investment companies launched two mainstream ethical index funds. Prior to that, I used to track Vanguard FTSE Social Index as a benchmark to check the trends in the stock market.
What to expect in the coming years? A Bank of America report estimated that there will be a “tsunami of assets” over $20 trillion to be invested in ESG funds over the next decades. It can compare to S&P 500 Index by its volume or visually saying one-fourth of the total AUM globally.
Every time I check news on hedge funds, an increasing number of U.S. funds is adding ESG criteria into their regulation and approaches. ESG will finally become the golden standard of asset labeling and investing activity.
To sum up, the global awareness of long-term sustainability is rising in the aftermath of COVID-19 crisis. This should be a positive catalyst for ESG investing. Along with ethical reasons and sustainable progress such assets can also cushion portfolios against the sharp volatility of stock markets.
I am a professional investor sharing my own thoughts and exploring ethical ways to invest. Stay tuned!
