Published:
Mar 14, 2020
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What happens to investing strategies focused on ESG during a market downturn or when oil prices nosedive? The short answer is no one knows.
ESG investing has become a $30 trillion-plus industry following the financial crisis of 2008. The premise is that companies scoring well on factors such as diversity, health and safety, and managing carbon risk will do better than their peers.
Yet ESG is untested in times of extreme stress, particularly with short-term market disturbances. We simply don’t know how investors and fund managers will act when squeezed for returns.
Some investors are proving to be sticky. A Bloomberg Intelligence analysis of ESG exchange-traded funds during the last week of February found that only 8% of US ESG ETFs saw outflows, compared to almost 25% of all ETFs – despite some of these indexes being down ~20%.
One positive side effect that has correlated with tough times in the market and current pandemics is the reduction in carbon emissions. In 2009 the US produced 10% less carbon emissions and China over the last 3 months has produced 25% less than the rolling average.
While that may be a “win” for ESG - it does raise an uncomfortable question. What happens to ESG when doing good isn’t necessarily the same as doing well?
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