Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Safe to say, most of us will look back on 2020 as a blot. A year best forgotten and consigned to the history books.

But as much as we may wish to move on, 2020 has left a lasting legacy. It’s a year that has fundamentally changed the way many of us live our lives.

At its peak, pandemic-induced volatility left a lot of investors scratching their heads, but COVID may have a longer-term ramification on the way we invest our money. Already it’s clear that 2020 has been a bumper year for sustainable investing.

Concern for companies and funds’ Environmental, Social and Governance (ESG) credentials is nothing new. People have always worried about how they invest their money. But 2020 has helped turn a relatively niche strategy into one of the most significant developments on the investment landscape in recent memory.

Social factors come to the fore

There are several factors behind the rise of sustainable investing this year. The first is that fundamental societal shifts mean investors care more about the impact of their investments than they did before.

In part, that reflects a long-emerging trend. A survey conducted by Morgan Stanley back in 2017 found that 75% of investors were interested in sustainable investing. The charge then was being led by millennial investors, who were nearly twice as likely to invest in companies or funds that target social or environmental outcomes.1

As millennials accumulated more wealth, the rise of sustainable investing felt inevitable. But this year has done much to help it along its way.

On the one hand, the worse the climate crisis gets, the more demand for climate-conscious solutions grows. But it’s the unequal distribution of COVID’s damage and the glaring social issues it’s brought to the fore that has really fuelled investors’ interest in ESG solutions this year. As NN Investment Partners explain: “A heightened focus on the wide-ranging social implications of the pandemic has shifted the emphasis from E to S in the last couple of months.”

That’s bearing fruit on the way people are choosing to invest. An Aviva survey of over 500 people with investments found that the majority (55%) said the pandemic had had an impact on their likelihood to take ESG factors into consideration when deciding where to invest their money.2 J.P. Morgan, meanwhile, found that of investors polled from 50 global institutions, 71% felt it was “rather likely,” “likely,” or “very likely” an event like COVID-19 would increase investor awareness of issues like climate change.3

Outperformance of sustainable companies

A second factor is the outperformance of ESG companies this year.

Previously, sustainable investing struggled to get past the underlying assumption that it came at the expense of returns. According to Morgan Stanley, the majority of investors polled in 2017 believed sustainable investing necessarily involved a financial trade-off (interestingly, that was truer of millennials than the general pool).

Fortunately, evidence gathered this year suggests the opposite is true. Analysts here at Fidelity assigned a sustainability rating of A-E to 2,659 companies and analysed their performance over January to September.

Gratifyingly, we found that stocks assigned the top Fidelity International rating (A) for sustainability outperformed the MSCI AC World index. Even better, each group outperformed the one beneath it in the rating hierarchy, meaning A beat B, B beat C, etc.

None of this should come as too great a surprise. On the one hand, companies that exhibit strong ESG credentials typically make for higher quality companies. Outperformance should be expected. But our study also ranked all the companies by return on equity and then re-ran the analysis within five return ‘buckets’. The same effect was seen each time. Regardless of quality, higher sustainability results in better performance.

This is good news. For sustainable investing to take its next step and become the ‘norm’, it will have to break free of the trade-off myth. As evidence mounts to dispel that myth, expectations rise that sustainable companies will continue to reward investors, while non-sustainable companies will be left in the dust.

Increased demand

Because more people are concerned about the societal impact of their investments, and because strong ESG companies have rewarded them with high returns, investors have poured their money into sustainable funds this year at an unprecedented rate.

Figures from the Investment Association published in November showed that responsible investment funds saw net flows of £7.1 billion in the nine months up to September - nearly four times the £1.9 billion seen for the same period over 2019.

As demand rises, so will the supply. PwC recently forecasted that as much as 57% of mutual fund assets in Europe will be held in ESG funds, up from 15% at the end of 2019.4

Whichever way you look at 2020, it’s certainly helped fuel the focus on sustainability across the financial industry. Hopefully, we can look back at this as at least one positive to emerge this year.

More on Sustainable and ESG investing

Source:

1 Sustainable Signals report, Morgan Stanley, 2017
2 Aviva, 29 October 2020
3 JP Morgan, 1 July 2020
4 2022 - The growth opportunity of the century, PWC 2020

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. An Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered

ESG investing; Funds

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