Environment, social and governance (ESG) investment performance experienced a breakout year in 2020, overcoming a major obstacle to growth and acceptance, according to a new report from Moody’s Investors Services.
The ratings agency showed that there was a significant rotation of investor flows globally into ESG investments last year which drove higher returns on multiple levels. “Even in a difficult environment for equity performance, these investments have seen strong returns and AUM growth among asset managers with a stronger emphasis in ESG products,” it adds.
For example, last year, the NASDAQ Clean Edge Green Energy Index, which tracks companies that are primarily manufacturers, developers, distributors or installers, of clean energy technologies, was the top performing US equity sector, with a total cumulative return of 185%. This is a hefty 136 percentage points above the next highest returning sector, consumer discretionary.
In contrast, the energy sector was down 33% in 2020 even though it started with a low valuation. Traditional energy also had poor returns in the prior year with a return of 9.4% compared to Nasdaq’s Clean Edge Index, which earned a 42.7%.
The report also revealed a notable outperformance at the country index level with Denmark as the second best-performing global stock market. This is mainly due to a high weighting in its index in green companies, notably windmill manufacturers and renewable energy companies.
The country exceeded mostly all broad equity country indexes even the technology-heavy S&P 500 in the US.
“The experience of 2020 will help remove investors’ worry that ESG investing means giving up returns, which has been a widespread barrier to growth in ESG products,” said Stephen Tu, vice president at Moody’s.
He added, “Before 2020 and the pandemic, ESG investments had met with frequent retail investor resistance because of a commonly held belief that ethically motivated investing – avoiding fossil fuels, for example – meant investors had to sacrifice profit and returns.”
Globally, $80.5 bn flowed into sustainable (ESG) funds in the third quarter of 2020, up 14% from the previous quarter, with separate data from Morningstar showing that assets under management hit a new high of $1.23 trn.
Looking ahead, Moody’s predicts that ESG investment products will be the next growth frontier for traditional asset managers.
It says that flows have been positive in recent years, and this will translate into a sharper focus on ESG investment themes, data and the incorporation of ESG considerations in investment analysis and product construction.