ESG and the road to recovery
Sustainable investing is here to stay—and with it an ever-increasing demand for complete, consistent, high-quality ESG data.
ESG and the road to recovery
Sustainable investing is here to stay
Sustainable investing is here to stay—and with it an ever-increasing demand for complete, consistent, high-quality ESG data.
The trend has been particularly pronounced in recent months, as pandemic-fueled market volatility has driven investors to seek alternatives to more volatile asset classes.
Sustainable investing has seen remarkable growth over the past several years, expanding from roughly $23 trillion AUM in 2016 to approximately $40 trillion this year, driven by mounting evidence that ESG performance is linked to financial performance, and increased interest from new customers and regulators. The market is also proving exceptionally stable. During the downturn in the first half of 2020, ESG saw a relative outperformance—and its mix of low-volatility, quality stocks, along with sector allocations, suggest room for more of the same.
This report brings together a selection of the daily ESG news, research and contextual analysis that Bloomberg Terminal subscribers receive via Bloomberg News, Bloomberg Intelligence and BloombergNEF. We hope you find it valuable, and invite you to get in touch if you would like to learn how Bloomberg’s ESG data and solutions—including newly launched proprietary ESG scores for companies—can help you navigate and act on market trends at every stage of the investment workflow.
The role of ESG in a decade of disruption
The role of Environment, Sustainability and Governance ('ESG') against the backdrop of COVID-19 is gaining greater attention.
This article was written in response to an exclusive webinar on the role of ESG in a decade of disruption.
The Bloomberg Women’s Buyside Network hosted an exclusive webinar on the role of ESG in a decade of disruption, featuring Fiona Reynolds, Managing Director, United Nations Principles for Responsible Investment (UNPRI), Dr. Mark Konyn, Group Chief Investment Officer at AIA and Virginie Maisonneuve, Founding Partner, MGA Consulting and Advisory Council Member, Future of Finance (CFA Institute), and moderated by Bloomberg’s Executive Editor, Tracy Alloway.
Joining from London, Singapore and Hong Kong, the speakers delved into many key aspects of ESG investing, including the case for the private sector playing a greater role in recovering from the COVID-19 crisis, and why responsible investing is the only way forward for the buy-side.
Kicking off the discussion with remarks, Fiona Reynolds said, “As we emerge from the crisis, we need to ensure that responsible investment is the only acceptable norm. Now is the time for decisive, collective action. The actions we take over the coming months, perhaps years, will lay the foundations for a stakeholder and sustainable driven global economy – one that aligns people, profit and our planet.”
ESG as the new normal for investing
Highlighting the growing importance of ESG in investing, Virginie Maisonneuve said, “I believe that the crisis is going to be an accelerator of ESG investments; the crisis is putting the focus on resilience, sustainability as well as trust. It has put the emphasis on the ‘S’ of ESG, which is absolutely critical when it comes to welfare of employees and clients and also global supply chains.”
Driving the point home, Dr. Konyn said, “ESG will move very quickly from being a marginal or specialized consideration within an asset program, to being the asset program itself. We are quickly going to collectively realize that this is how to invest if you want to protect your asset from unseen climate events and external risks.” Speaking about how ESG is inextricably linked to the investment ethos at AIA as an asset owner, he said, “Our investment program takes our value proposition, which is to help our customers lead healthier longer better lives, and turns it into an ethos around how we allocate our financial resources. We focus on long-term sustainability, while delivering financial performance.”
The crisis presents the global economy with a chance to ‘build back better’. Ms. Reynolds added that “responsible investors are urging the companies that they invest in to also have a long-term mindset.”
The future of ESG investment
“This is a great PR and communications opportunity to really further the ESG agenda for professional investors, asset owners and fiduciaries,” said Dr. Konyn. “But whether or not it will resonate amongst the broader business community and stakeholders, is an open question,” he added. Elaborating on the role of fiduciaries, he said, “The time has come for fiduciaries to push forward with the ESG agenda. I think they have a responsibility to allocate capital responsibly, and that goes beyond the basic instructions given by the asset owner. They need to make it a broader consideration in their investment decisions or risk longer-term underperformance as an asset manager.”
Asked where she sees ESG Investing a decade from now, Ms. Maisonneuve said, “more AUM, more innovation, more products, more partnership with clients, more dichotomy between stocks of ESG companies and those that are not — I think we will see a lot of bankruptcies of companies who can’t be sustainable, and there should be more regulation to support the private sector to go in that direction.”
“I expect that all investments will become responsible. The pandemic is a stark reminder that without healthy people, without a healthy planet, there will not be a healthy economy. People, profit and planet are all connected, and one must not come at the cost of the other. If you push the needle too much off centre, you have to be prepared to pay the price. To me, nature strikes back, and nature always ultimately wins,” concluded Ms. Reynolds.
Bloomberg Women’s Buy-side Network (BWBN) is an informal community for women in asset management in Asia. Launched in 2018 in Singapore, the network has expanded to local chapters in India and Hong Kong, helmed by some of the most influential buyside leaders including Virginie Maisonneuve and Dr. Mark Konyn. BWBN convenes women in the buyside on global investment trends, serves to promote inclusion in the industry and educate on the diversity of buyside careers through active mentorship. To find out more, please email bwbnhk@bloomberg.net or check out www.bloomberglp.com/bwbn.
Our full suite of sustainable finance solutions on the Bloomberg Terminal empowers asset owners, asset managers, issuers, regulators and more to identify, analyze and capitalize on material business risks such as climate risk and emerging sustainability opportunities such as low-carbon energy transition. For more information, visit www.bloomberg.com or request a demo.
COVID-19: ESG trailed in recovery but may reign long term
Despite providing a buffer during the coronavirus-driven downturn, ESG indexes have seen short bouts of relative underperformance during the recovery that began in April, something we expect to continue.
This article is by Bloomberg Intelligence analysts Shaheen Contractor and Christopher Cain. It first appeared on the Bloomberg Terminal.
This is driven by ESG indexes' factor exposures which tend to tilt toward a mix of low volatility and high-quality stocks. Due to this, ESG indexes provide a buffer during downturns yet fail to keep pace when the market heats up, something that's been reinforced throughout this year.
Even though results are mixed since April, ESG saw a relative outperformance during the 1Q downturn, supported by the fact that quality has outperformed rival factors this year. ESG's mix of low-volatility, quality stocks, along with sector allocations, suggest room for longer-term outperformance.
Performance during COVID-19 downturn
Analysis of environmental, social and governance (ESG) ETFs during the sell-off for the week ended Feb. 28 reinforces our view that these indexes provide a buffer during downturns, as select ESG indexes outperformed their benchmarks. Only 8% of U.S. ESG ETFs saw outflows vs. 22% of all U.S. ETFs, suggesting ESG is seen as a long-term investment more than a trading strategy
COVID-19 may change corporate sustainability as we know it
While assets to most smart-beta ETFs fell in 1Q due to the market downturn, ESG and values-based ETFs were among the few to hold assets constant, reinforcing our views on ESG being a long-term investment.
This article is by Bloomberg Intelligence analysts Shaheen Contractor and Eric Balchunas. It first appeared on the Bloomberg Terminal.
Launches could double vs. 2019 and as competition and fee pressures increase, unique strategies at low costs will be key. Active ETFs are increasing and new launches could see a boost by catching a rally out of the gate.
Increased flows help ESG ETFs maintain steady asset bases
Despite the coronavirus-driven drawdown, assets in ESG and values-based ETFs remained steady at over $86 billion. ESG ETFs saw a relative outperformance with the largest contributor to its steady asset base being consistent flows – over $16 billion. Low-cost funds will continue to drive growth. A large reason for increased flows is BlackRock moving its ESG ETFs (such as iShares ESG MSCI USA ETF, or ESGU) into its own portfolio models, something that might not represent organic market demand.
Assets are calculated by summing up share class assets. Such ETFs consider ESG factors, employ exclusionary screens or have thematic focuses like gender.
ESG, values-based ETFs and assets
North America closes gap with Europe driven by increased flows
Although Europe has been a traditional leader in ESG and values-based ETFs, North America could continue to close the gap, due to increased interest. Flows to North American domiciled funds overtook Europe for the first time in Q1, resulting in assets increasing 11% vs. 2019 while falling 3% for European funds. Competition and fee pressures have intensified across regions. Along with the impacts of the downturn, this will lead to smaller expensive strategies getting crowded out, unless they outperform and funds see adequate demand. The small nature of funds and an overcrowded U.S. market will add to liquidation pressures.
Assets are fairly consolidated with market leaders, BlackRock, Vanguard and Invesco accounting for over 60% of assets in the U.S. and BlackRock, UBS and Societe Generale accounting for over 70% in Europe.
ESG, values-based ETF assets by fund domicile
New fund creation might double this year if pace continues
ESG and values-based ETF creation accelerated in Q1, with 40 funds being launched or rebranded. If the pace continues, new launches for 2020 could almost double vs. 2019. Large managers with low-cost structures will continue to drive down fees with the median for 2020 launches reaching 0.23%. An increase in fees to 0.3% in 2019 due to the launch of multiple active ETFs and complex themes serve as a reminder of the challenges that small, complex themes face. Along with the jump in fees in 2019, the liquidation of multiple high-cost thematic strategies, such as diversity was prominent, with most charging more than 0.6%. As the market moves toward low-cost strategies, such complex and expensive themes may struggle to gather assets.
ETFs created, median fees by year of inception
Thematic active ESG ETFs add flexibility and costs
The current market could give active ETF launches a boost by catching a rally out of the gate. Active ESG ETFs have been increasing over the last two years with five new funds launched in Q1. Such ETFs allow for more flexible strategies but add to costs. Flexibility could gain in importance as asset managers differentiate themselves in what is evolving to be an increasingly competitive marketplace. As large asset managers with low-cost structures put pressure on fees, unique strategies at a low cost may become key for growth. While such new thematic strategies can support expansion, they’ll add to analytical challenges amid an increasingly diverse array of products.
BMO Global Asset Management and JP Morgan are among asset managers with active ESG ETF strategies.
Active ESG, values-based ETFs
All roads (or most) lead to ESG during economic downturn
Exchange-traded funds (ETF) focused on companies with leading environment, social and governance (ESG) performance not only survive during economic downturn, they thrive.
This article is by BloombergNEF analyst Kyle Harrison. It first appeared on the Bloomberg Terminal.
ESG-focused ETFs saw net inflows of investment nearing $3.4 billion in May, despite the Covid-19 pandemic and ensuing economic disruption. Though net inflows in May were down from $5.1 billion in April, they still exceed any month prior to 2020. Investment into these funds shows that investors prefer to put their money behind ESG funds and ride out market uncertainty during economic disruption, rather than withdrawing their investments, according to Bloomberg Intelligence.
- Net inflows for ESG ETFs approached $3.4 billion in May
- 79% of funds saw inflows; MSCI USA led with $558 million
Some 79% of ESG funds saw net inflows during May, up from 77% in April. The iShares ESG MSCI USA ETF saw net inflows of $558 million, leading the pack among ESG ETFs. Key portfolio companies in the MSCI USA ETF include tech companies like Apple and Microsoft, but also oil and gas companies with sustainability goals, like Exxon Mobil and ConocoPhillips.
ESG ETF net flows, by month
