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ESG Funds Remain Relative Safe Havens in Coronavirus Downturn

Written by: Michael Copley, Esther Whieldon and Robert Clark | S&P Global

Investment funds set up with environmental, social and governance criteria remain relative safe havens in the economic downturn caused by the coronavirus pandemic, supporting claims by ESG investors that their focus on nontraditional risk leads to more resilient portfolios.

S&P Global Market Intelligence analyzed 17 exchange-traded and mutual funds with more than $250 million in assets under management that select stocks for investment based in part on ESG criteria. Of those funds, 14 have lost less value this year than the S&P 500, up from 12 in April. The top performer in the latest analysis, the Nuveen Winslow Large-Cap Growth ESG Fund, gained 3.4% in the year through May 15 compared to an 11.4% decline in the S&P 500.

ESG proponents say sustainable investment strategies tend to steer more money to companies with the best prospects for long-term growth.

"Looking forward, we expect investors to continue demonstrating an appetite to implement these kinds of long-term sustainable investing strategies," said C.D. Baer Pettit, president and COO of research and data firm MSCI Inc., on an April 28 earnings call. "And our research indicates this has been a successful approach during the crisis so far," he added, saying that the company's ESG indexes "have shown resilience even more notably in the first quarter of this year."

Sustainable investment funds in the U.S. saw a record $10.5 billion of net inflows during the first quarter, according to Morningstar Inc.

S&P Global Inc. CFO Ewout Steenbergen told investors May 12 that the coronavirus crisis is likely to focus more attention on ESG's social component — in this case, how companies treat employees — and on the value of having supply chains in countries with "transparent" governments.

"The acceleration of ESG will only continue," Steenbergen said. "And certainly, the current environment will help with that."

Green momentum

For some investors, the health and economic crisis is also highlighting the need to invest in climate change.

"Our [environmental] problems that we have today, we're still going to have them tomorrow," said Everett Smith, managing partner of the clean energy investment firm Greenwood Sustainable Infrastructure LLC, in a recent interview. And in a volatile market, "the kinds of assets that we're investing in are throwing off long-term, visible, stable cash flows," he said.

So far, renewable energy assets such as wind and solar plants have proven to be financially resilient since in many cases they sell electricity under fixed-price, long-term contracts that help to shelter their revenues from economic disruptions.

"[The] underlying theme of investing in climate change solutions is proving a durable asset class and one that we believe will come out of this crisis even stronger," said Jeffrey Eckel, chairman, president and CEO of renewable energy investor Hannon Armstrong Sustainable Infrastructure Capital Inc., on a May 7 earnings call.

Additionally, there is a push for governments to make clean energy a cornerstone of their economic recovery packages, which could provide a big capital infusion to the sector and increase the momentum of investment.

"[The] build-out of wind and solar power have become a cost-effective way of decarbonizing societies while driving local economic activity and job creation," said Henrik Poulsen, president and CEO of Ørsted A/S, the world’s leading wind farm developer, on an April 29 earnings call. "As such, we are convinced that the public and political focus on sustainability and green investments will remain strong."

The iShares Global Clean Energy ETF, which is managed by BlackRock Fund Advisors, is down 8.2% in the year through May 15, outperforming the broader market. The fund's largest holding is in Enphase Energy Inc., a solar equipment manufacturer whose shares rose 123.4% year-to-date through May 15.

"We believe this focus on ESG will become increasingly important, especially as the coronavirus pandemic brings greater attention to the investments needed to make our economy, society and environment more sustainable and accessible to all," said Claire Peel, CFO of German asset manager DWS Group GmbH & Co. KGaA, on an April 29 earnings call.

Related: The Two Investment Megatrends of the Decade