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Investors Look to ESG Investing During Market Volatility

Published on

March 20, 2020

A persistent misconception about ESG investments is that investing with your values means accepting lower than market returns. In 2015, for example, two-thirds of investors reported being uncertain about whether ESG investments can offer returns competitive with traditional funds. (1)

But a new consensus is slowly emerging: last year, that figure is down to 40%, according to recent research surveying 500 issuers and 500 investors across Europe, Asia, the Middle East, and the Americas.  This is likely to continue trending downwards as studies tracking ESG funds prove not only their competitiveness with traditional funds, but their particular resilience to market shocks. 

Source: Morgan Stanley analysis of Morningstar data, 2019

As ESG data becomes increasingly robust and standardized, recent research is converging on the finding that ESG investing can help investors weather market volatility even better than traditional alternatives. 

“ESG considerations are material to companies’ financial results. Environmental stewardship is not just good for the planet—it’s also about controlling costs, avoiding damaging incidents, and positioning for tomorrow's economy. Treating workers well benefits society but also helps a company attract and retain talent—critical in the knowledge economy. Good governance leads to better corporate decision-making.”

-Morningstar 2019, ESG Investing Performance Analyzed

Bank of America Merrill Lynch, for example, found that an investor holding stocks with above average overall environmental and social scores would have avoided more than 90% of the S&P 500 bankruptcies that have occurred since 2005, while BlackRock has found commonalities between ESG performance and balance sheet strength, suggesting a link between ESG-optimized portfolios and resiliency in downturns.

Morgan Stanley, for their part, using Morningstar data from over 10,000 funds between 2004–2018, has also found that ESG-focused funds not only provided returns in line with comparable traditional funds, but exhibited reduced downside risk. 

Source: Morgan Stanley analysis of Morningstar data, 2019

Despite the slow shift in public perception, recent evidence is converging on the conclusion that savvy ESG investing can improve portfolio resilience without sacrificing returns.

Why might this be? Intuitively, it makes sense that companies with good governance, resilient supply chains, and environmentally sustainable business practices would be best positioned to weather downturns. As it turns out, ESG data is increasingly providing savvy investors with the intelligence to identify companies with healthier balance sheets, stronger competitive advantages, and lower volatility than their mainstream counterparts - considerations that are material to companies’ financial results. 

Empirical research from academia has been pointing to this conclusion for years, but only recently has the financial industry embraced the contribution of ESG to the bottom line: in 2018, Morgan Stanley’s Sustainable Signals Survey indicated that 78% of respondents listed risk management as an important factor driving their adoption of sustainable investing, while Bank of America Merrill Lynch reportedly identified ESG as a stronger indicator of earnings risk than any other factor.

Source: Morgan Stanley

At the end of the day, investing in causes you or your clients care about doesn’t have to mean sacrificing returns. A consensus is emerging that when the markets experience volatility, it’s companies with high ESG scores—those that have invested in the long-term wellbeing of their shareholders, communities, and planet—that can demonstrate the most resilience. ESG investing is simply becoming smart investing.



(1) Bank of America Merrill Lynch, 2015 ESG Research, “A Roadmap to Leadership in ESG and Social Impact,” Page 15.

Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. One cannot invest directly in an Index. Any opinions, estimates and forecasts offered in this document constitute judgment as of the date of the materials and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information contained in this document to be reliable but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and it is not intended to provide and should not be relied on for investment, accounting, legal or tax advice. OpenInvest may not have verified (and disclaims any obligation to verify) the accuracy or completeness of any information herein that has been provided or obtained by third parties.

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