Stockholm (NordSIP) – As the Coronavirus spread around the globe at the start of 2020, it quickly became clear that the response to the crisis would involve the participation of ESG investors. Even as financial markets shut down, responsible investors stood firmly at the ready to channel capital to fund COVID-19 social bonds. However, the crisis appears to have had an enduring effect on ESG investments by raising awareness about the benefits of this strategy for investors and asset managers. Indeed, data from inflows to global funds suggests that demand for exposure to this market segment is at an all-time high.
ESG Fund Flows at Record Highs
According to Calastone, a London-based global funds network that processes £190 billion of investment value each month, inflows into ESG funds amounted to £362 million in July. Of this total, £320 million was directed to global funds. Calastone’s analysis shows that this is significantly above the regular global fund inflow of £285 million. The firm explains that in June and July, ESG fund flows represented half of all global fund flows, whereas, over the last 12 months, ESG ESG investments have accounted for a third of flows into global funds.
“ESG funds are exploding in popularity,” Calastone’s latest Fund Flow Index report says. “Each of the last four months has set a new record for inflows. Moreover, the total £1.2bn that has flowed into ESG funds since April is greater than all the previous five years combined across the entire FFI on record.”
What’s going on?
According to Aviva Investors’ Steve Waygood, Rick Stathers and Mirza Baig, COVID-19 raised the profile of ESG investments. “Crisis conditions have boosted the importance placed on ESG metrics and served as a powerful illustration of why a holistic approach to investment risk matters,” the sustainable investment specialists explained at the start of July. “Those that are resistant to change or looking for an excuse have COVID-19 to hide behind,” Baig added. “But those with a more enlightened view will likely have heightened awareness of the social and financial costs associated with the systemic nature of the ‘e’ and’s’ issues that need to be addressed. Of course, there will be competing interests in the near term. But over a longer horizon, we expect this experience to galvanise people’s commitment to dealing with them.”
However, ESG investments are not only appealing to investors. They are also appealing to asset managers. Discussing the booming trend in ESG funds, Edward Glyn, head of global markets at Calastone, noted that global funds have benefited from “a huge marketing push by the fund management industry in favour of ESG funds, partly in response to very strong investor demand for ESG products and partly because they offer better margins for managers. Indeed because ESG funds tend to be actively managed, they are also the one area of real strength for active equity funds, which are otherwise suffering at the expense of their passive counterparts.”
Naturally, demand did not emerge in a vacuum. While much of it is a focus on investing in the future survival of the planet through green investments, equitable societies and well-governed companies, an increasing body of academic research also suggests that ESG investments can outperform their traditional benchmarks. Indeed the figures published by Calastone echoes previous evidence presented in May and July by MorningStar, highlighted the rise in ESG inflows and the outperformance witnessed in this segment this year. Performance is at the core of the ESG investment thesis. In the words of Giles Parkinson, who runs the Aviva Global Equity Endurance fund, ESG “really matters because it is important to what a stock is worth and ultimately we need to deliver outperformance by supporting market efficiency. (…) As a fund manager this is just what you need to do.”