HARLIN SINGH, HEAD OF SUSTAINABLE INVESTING
We expect to see continued, compelling performance from top-performing ESG companies not only as the pandemic plays out but for generations to come.
KEY MESSAGES
Rather than returning to our prior normality after COVID-19, we believe many investors wish to "build back better"
The harsh realities and increasing realization of the interconnected factors underpinning COVID-19’s impact have, in our experience, driven investors to aspire not to return to their former "normal" but, rather, to "build back better." For investors who choose to build back, this takes many forms. Some want to double down on their efforts to combat climate change, develop clean energy, or drive adoption of wiser natural resources use.
Some have a fierce resolve to expand vulnerable communities’ access to education, employment, and basic needs such as clean water, food and healthcare. Many seek all of the above.
At Citi Private Bank, we believe such investors can, indeed, effect positive change with private capital. We established Investing with Purpose (IwP), our open-architecture platform of sustainable investments with a dual mandate of achieving competitive financial returns and driving positive societal change with vehicles that integrate Environmental, Social and Governance (ESG) criteria. Our reasons for this are many. In our experience, high ESG standards are a mark of a higher-quality investment, with lower levels of material risks that can include regulatory fines and legal action from unethical or unfair business practices, along with “pre-financial” risks including headline and reputational risk. Many have stricter oversight of their supply chains – a critical strength in an outsourcing world.
1 Source: Morningstar Direct 1 Jan 2020 – 31 Mar 2020. Note: Oldest share class used for mutual funds. We compared the returns of all 206 sustainable equity open-end and exchange-traded funds available in the US with their peer groups. Peer groups per Morningstar categories: buckets funds based on region, market cap, and style, and contains both sustainable and conventional funds. Past performance is not indicative of future results. Environmental, social and governance (ESG) principles should not be the only consideration when making an investment decision. Selecting investments based on ESG principles will not guarantee positive future returns. There can be no assurance that any Socially Responsible Investing (SRI) screening process will achieve its goals or that an investment will not incur losses.
The growth of sustainable investing reflects this appeal of ESG as an additional lens alongside traditional fundamentals. It also provides investors an opportunity to invest in alignment of the changes they want to see in business practices, the environment or society. Choices frequently cited include health care, biotech, clean energy and affordable housing.
Vis-à-vis a pandemic such as COVID-19, ESG considerations are thick on the ground. If one had to select just one criterion each for E, S, and G, needs for the clean water that allows for hygienic manufacture of medicine and vaccines, mechanisms that determine and deliver the vaccines to those at greatest risk, and safety protocols that enable fasttracking trials and production spring to mind.
It is worth noting that in the first quarter of 2020, 70% of US ESG-focused funds delivered top half performance.1 This is consistent with ESGfocused ESG managers’ superior risk-adjusted returns relative to traditional managers from 2010 through 2019.2
ESG is still, to a degree, a developing approach to investing, with growing metrics, frameworks and standardized reporting requirements. As it matures we expect to see continued, performance from top-performing ESG companies, not only as the pandemic plays out but for generations to come.
When compared to traditional managers, ESG-focused managers had comparable returns with lower risk, resulting in superior risk-adjusted returns between January 2010 through December 2019
2 Source: Morningstar; 1 Jan 2010-31 Dec 2019. Past performance is not indicative of future results. Office of the Chief Investment Strategist, Citi Private Bank. We used data on 528 US equity funds with data back to 2010 from the Morningstar database. Of these, 58 were assigned to the high ESG score universe based on Morningstar’s methodology; all others totaled 470 funds. We compared the high ESG funds and all others on an equal-weighted basis for return and standard deviation. The Sharpe ratios shown were calculated on the aggregated returns and standard deviations. Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. A portfolio with a higher Sharpe ratio is considered superior relative to its peers. Environmental, social and governance (ESG) principles should not be the only consideration when making an investment decision. Selecting investments based on ESG principles will not guarantee positive future returns. There can be no assurance that any Socially Responsible Investing (SRI) screening process will achieve its goals or that an investment will not incur losses.