How has ESG and sustainable investing performed during the pandemic?

14.10.2021

With the UN Climate Change Conference (COP26) fast approaching, the topic of sustainability is on everybody’s lips as representatives from a variety of countries prepare to discuss climate change. In recent decades, human activity has made a noticeable impact on our planet, from rising sea levels to plastic pollution.

If you’ve been wondering what you can do to reduce your carbon footprint, you might be surprised to learn that changing your investing habits can make a significant impact.

For example, according to a study published by Money Marketing, if the average saver moved their pension wealth to a sustainable fund, they could save 19 tonnes of carbon each year.

Sustainable and ESG funds can be good choices if you want to align your investments with your personal values, but you may be wondering whether this is a financially sensible decision. Read on to find out how ESG investing has performed during the pandemic.

The pandemic has been a real test of sustainable and ESG investing’s performance under severe market volatility and stress.

As you may know, sustainable and ESG investing is an investing strategy that has boomed in popularity in recent years. The pandemic has undoubtedly accelerated this trend. Its focus on the environmental, social, and governance aspects of an investment mean that it can be a good choice for an investor who wants to grow their money in a sustainable way with due consideration to these aspects.

Furthermore, this strategy has grown in popularity in recent years. According to figures published by Citywire, Brits invested around £1 billion each month into sustainable and ESG funds in 2020, which accounts for 43% of all industry sales.

It is important to remember that unlike the older style of ‘ethical’ investing where undesirable areas such as tobacco or armaments were wholly excluded via a negative screening process, sustainable and ESG investing will seek to influence the underlying investee companies to improve their ESG outcomes. In other words, encourage companies by active engagement and dialogue to be agents of positive change across a wide range of issues.

So far, this all seems rather good, but you may be wondering how sustainable and ESG criteria affect returns. One of the main accusations that critics have used in the past to disparage ESG investing is the idea that investors have to sacrifice investment growth to take a principled stance.

The coronavirus pandemic was the biggest real acid test of how well such investments perform under extreme market pressure. Thankfully for supporters of the strategy, it appears that investing with your heart as well as your head can have its rewards with a notable pleasing performance. However, it is important to remember that short-term performance should be treated with caution and is not indicative of future performance.

Many ESG funds saw strong growth during the pandemic

The impact of the coronavirus pandemic and subsequent lockdowns had a significant effect on the UK economy in 2020, and stock markets fell accordingly. According to figures from the Guardian, the FTSE 100 index fell by 14.3% in 2020, its worst year since the 2008 financial crisis.

However, while the value of many funds plummeted, the ones that stuck to sustainable and ESG principles performed relatively well.

According to a study by Morningstar, three-quarters of ESG-screened indexes outperformed their broad market equivalents in 2020. Furthermore, almost nine-tenths of such funds outperformed for the five years through to the end of 2020.

One explanation for this is that while the strategy of sustainable and ESG investing may avoid some profitable but unsustainable sectors, its focus on long-term sustainability and profitability gave it an edge during the period of economic disruption.

For example, during the pandemic, one of the most notable changes to our daily lives was the shift towards working from home. Since there were fewer cars on the road, there was a lower demand for fuel, and this impacted the price of oil.

While the energy sector had previously seemed like a reliable and steady investment to many people, the pandemic demonstrated the benefits of investing in sustainable areas. For example, sectors such as healthcare technology and pharmaceuticals, which many sustainable and ESG funds invest heavily in, saw strong growth.

With this in mind, it may not be surprising that according to a study by Aviva, more than half of investors surveyed stated that they are now more likely to consider sustainability in their investing strategy.

Investing according to ESG principles can be a good way to grow your wealth sustainably

In recent years, there has been greater awareness of the impact that pollution and carbon emissions are having on our planet, as well as the consequences that they may have on our way of life. With the COP26 summit just around the corner, you may be wondering how you can do your part.

According to FTAdviser, more than two-fifths of advisers have seen an increase in sustainable and ESG requests from their clients throughout 2020. This may not be surprising since, as we’ve seen, the pandemic has demonstrated that ESG investing can have both moral and material benefits.

If you want to do your part to make the world a better place, while also growing your wealth, then ESG investing might be right for you.

Get in touch

If you want to know more about how sustainable investing can help you, get in touch. Please email us at advise-me@fosterdenovo.com or call us on 0330 332 7866 to speak to one of our team.

Please note:

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The FD Sustainable Dynamic Portfolios are managed by FD Dynamic Portfolios Limited (FDDPL), which is an appointed representative of Foster Denovo Limited (FRN 462728), which is authorised and regulated by the Financial Conduct Authority (FCA). FDDPL has issued this document in its capacity as investment adviser to the investment manager, AB Investment Solutions Limited (FRN 705062), which is authorised and regulated by the Financial Conduct Authority (FCA).