Climate, governance, and supply chains are the top environmental, social, governance (ESG) topics for institutional investors this year who believe the biggest improvements in the sector are in oil, gas, and Asia, according to a survey.
During Bank of America’s (BofA’s) global ESG conference, 49% of institutional investors thought oil and gas had the biggest room for improvement in terms of ESG, followed 44% for utilities, 34% for consumer discretionary, and materials at 31%.
“Asia (41%) offered the biggest opportunities for outperformance from ESG improvement. Both corporates and Governments are expected to play influential roles in shaping ESG during 2021,” BofA said.
“Over 80% of respondents say ESG has a role in better management of investment risks. This was double the rate of those who use ESG just as part of fiduciary duty and highlights the role non-financial considerations can play in managing volatility.”
On supply chains, BofA said customers continued to be price-sensitive but did not trade price and quality against sustainability.
“Customers now have a deeper understanding and growing interest in sourcing of the raw materials, supply chains, particularly in the clothing business (a line of active wear made from recycled plastics sells particularly well even at a small premium),” it said.
Despite a tumultuous year for equities brought by the COVID-19 pandemic, the top performing ethical/sustainable global equity fund during the first 11 months of 2020 was CFS Baillie Gifford Global Stewardship A at 55.69%, according to FE Analytics.
This was followed by AtlasTrend Clean Disruption at 26.67%, BetaShares Global Sustainability Leaders ETF at 24.24%, Pengana International Ethical at 16.85%, and Pengana International Ethical Opportunity at 16.15%.
Over the longer term, the top-performing ethical/sustainable global equity fund was Pengana High Conviction Equities A at 194.62% over the five years to 30 November, 2020.
This was followed by CFS Generation WS Global Share at 103.49%, Nanuk New World at 83.37%, Macquarie Walter Scott Global Equity at 79.71%, and CFS Steward Investors Wholesale Worldwide Sustainability at 73.4%.
Top performing ethical/sustainable global equity funds over the five years to 30 November 2020
Source: FE Analytics
BofA Global Research head of ESG research, Savita Subramanian, said 2020 as a big year for ESG investing and expected the momentum to continue in 2021.
Subramanian noted that institutional investors had doubled the usage of ESG over the last few years and four-out-of-five individual investors used or wanted to use ESG in their investment processes.
“ESG factors outperformed the market in 2020 more than a typical year and even on a sector neutral basis,” BofA said.
“…Our research shows ESG factors have been one of the best signals for earnings volatility, price volatility, bankruptcy risk and so forth.”
EPFR data echoed these sentiments which found that by the end of 2020, investors were rebuilding their exposure to emerging markets equity and debt, rotated from actively managed funds to lower cost exchange traded funds (ETFs), added to their hedges against inflation, pumped more money into funds with socially responsible (SRI) or ESG mandates, and bought into the post-pandemic technology, healthcare, and consumer rebound themes.
Within developed market equity funds ESG/SRI had record inflows at US$168,740 million ($216,456 million), according to EPFR’s preliminary 2020 flows. This was compared to a loss of US$135.413 for the developed market equity fund sector itself.
On emerging market equity funds the research house said: “Retail flows were positive for the 11th week running and funds with SRI or ESG extended a run of inflows stretching back to early June”.
