Friday Highlight  

Time to start pointing clients to ESG funds?

Time to start pointing clients to ESG funds?

Now may be the optimum time to be pointing clients to environmental, social and governance-based investment funds, specialists have said, as performance data shows principles-led investments have outperformed their peers. 

The Covid-19 lockdown-related reduction in oil demand, combined with a price war between two of the biggest suppliers, Saudi Arabia and Russia, has wrecked the fossil fuel market.

Despite recent promises by President Donald Trump to help restore relations between the two oil giants, the price of crude oil has been falling - even into negative territory - and taking down along with it those companies and sectors associated with the fossil fuel industry.

Conventional funds with exposure to fossil fuels have taken a huge hit as shareprices plummeted, while those invested in companies with strong ESG strategies have been protected from the blow.

It is easy to say this is because many 'green' funds employ screening against environmentally damaging and volatile commodities, like oil.

However, funds that hold themselves out to be aligned with ESG principles also have been investing in those companies with solid growth potential as the trend towards clean energy and carbon-neutral business models grows irrespective of global pandemics or fossil fuel woes.

This has presented a double benefit: avoiding sectors most exposed to macroeconomic shocks and investing in companies that have a strong pipeline of business ahead of them.

Indeed, recent reports state MSCI Europe ESG Leaders index has been outperforming the EU benchmark by 180 basis points since the beginning of the year - long before Covid-19 came onto the scene.

MSCI’s Japan and US ESG Leaders indices have outperformed by 50bp.

ESG funds are also reported to have only fallen half as much as the S&P 500 Index during the coronavirus pandemic. 

Value in ESG

Simon Clements is manager of Liontrust Sustainable Futures Global Growth Fund. He points to the fact that when times are tough and markets show volatility, ESG funds exhibit greater stability.

Mr Clements says: “We do believe that oil is a structurally challenged business. The transportation sector is still heavily reliant on oil, and with the inflection we are seeing in electric vehicles, and increasing awareness of the risks around climate change, we view it as ex-growth and risky.”

“Over the past three years, we benefited from having a zero weight to the entire energy sector because our process is fossil fuel free. Around 10 per cent of the three year outperformance versus the MSCI World benchmark is attributed to our energy position.” 

Mr Clements cites the stocks of two companies - Cellnex, a European Tower company, and Thermofisher Scientific, a US based Life Science company - as contributing about 4 per cent of the entire portfolio between them over the past three years.