Sustainable indexes largely outperformed during the first quarter of 2020 amid market turmoil caused by the coronavirus pandemic, according to BlackRock Inc.’s latest sustainability report.
“While this short time period is not determinative, it aligns with the resilience we have seen in sustainable strategies during prior downturns,” said the report.
The big question for institutional investors remains why these groups of companies suffered less than their peers during these turbulent times. One feature of sustainability is that it appears to correlate with specific traditional factors, such as quality and low volatility, which themselves indicate resilience.
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However, the report noted these factors don’t capture every aspect that could make one company more resilient that another. “Analyzing the various sustainability characteristics of companies — and how these characteristics contributed to performance — deepens our understanding of how sustainability reinforces resilience.”
Traditional financial accounting standards don’t provide a view of every risk faced by companies, said the report, necessitating the examination of material sustainability characteristics as well. BlackRock delineates these characteristics as descriptors, from talent management to waste management to board effectiveness, using them in the hopes of teasing out insights that market participants may not have fully factored in.
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The report also refuted the idea that strong performance by environmental, social and governance funds was attributable primarily to their underweighting of traditional energy companies, which have fared extremely poorly throughout the crisis. While this underweighting may have played some role, it would only account for a small part of the outperformance among sustainable funds.
As well, the current crisis is just one moment in the “long-lasting shift toward sustainability,” the report noted. Globally, the first quarter of 2020 saw US$40.5 billion in new investments into sustainable funds. In the U.S. specifically, the US$7.3 billion in new capital amounted to a record quarter.
“We believe flows into sustainable assets for the first quarter of 2020 is just a glimpse of the major reallocation to come,” said the report. “The COVID-19 downturn has created an opportunity for investors to further rebalance portfolios into sustainability coming out of the crisis, given strong performance and opportunity to tax-loss harvest.”