ESG-focused funds prove resilient; pandemic encourages private markets’ adoption of sustainable strategies.
Investors have favoured ESG-based market opportunities in the wake of the Covid-19 pandemic, according to Maximilian Horster, Head of Climate Solutions at Institutional Shareholder Services (ISS), and will likely continue to focus on sustainable investing going forward.
“Looking at the net sales and inflows of ESG and regular non-ESG investments, the observation is that ESG investments are more resilient and, to a certain extent, have benefitted from the Covid-19 crisis,” Horster said.
Taking part in the Sustainable Investor Summit (SIS) Online, Horster was part of a panel discussing the global implications of Covid-19 and the climate crisis on institutional investing across all asset classes.
Non-ESG fund sales saw a huge drop of €260 billion in March in Europe, while ESG funds fell only €23 billion in comparison, according to ISS data. By July, regular fund sales were not back at pre-pandemic levels with only €29 billion in overall cash flows, while ESG-focused funds saw inflows totalling €21 billion. At the beginning of 2020, ESG-focused funds logged €14 billion.
“The lessons from this current crisis will guide our response to the next one,” said Janina Lichnofsky, Senior Specialist Sustainability at MEAG Munich Ergo Asset Management, the investment management arm of Munich Re Group. “From an asset manager’s point of view, one of the most important lessons is that inaction and delay will be very costly. Delayed climate action implies high costs, and it will lock economies into carbon-intensive infrastructures.”
Rather than distracting investors from sustainability themes, she said the Covid-19 crisis had made ESG more important.
Despite the uncertainty posed by the pandemic, private markets are already adapting, according to Steve Bernat, Founding Partner of ONE group solutions.
“Private equity (PE) firms have started investing in what they believe will sustainably succeed in a post-pandemic market. Unlike previous recessions, this pandemic will probably have many second-order and even longer-term effects on business models,” he said.
Bernat noted a surge in investor optimism following prolonged periods of successful fundraising prior to the pandemic. In the global private equity space, for example, PE firms stockpiled approximately US$2.5 trillion in ‘dry powder’, i.e. available unallocated capital.
“Clearly, the private markets’ resilience to the effects of the pandemic has forwarded their ESG journey. Investors looking to invest in ESG products are projected to nearly double in the next two years,” Bernat said.
Investors should continue to assess ESG opportunities, but they should not discount the possibility of further regulatory changes that will affect their approach to business, panellists said. Regulatory interventions in the financial markets, such as the EU Taxonomy, should be seen as a response to market failure, according to Young-jin Choi, Head of Impact Investing at the engagement services providers Phineo.
“This is a substantial market failure that not only includes the financial industry but the real economy too,” he said, noting that the costs of failing to tackle the crisis were still being priced into market valuations.
The real economy should be given proper incentives, rules and regulations to change its footprint, said Choi, saying the influence of financial markets and investors should not be “overestimated”.
“Carbon pricing, for example, is one of the biggest leverage points and can affect the real economy to the extent that mainstream financial markets will just follow the profit,” Choi said.