New BlackRock research points to ESG resilience during coronavirus downturn

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As sustainable investing and ESG (environmental, social, and governance) trends continue to soar among hedge funds, new research by BlackRock suggests a majority of ESG-tilted investment portfolios have outperformed non-sustainable counterparts during this year’s coronavirus-fuelled downturn.

In a wide-ranging new report, ‘Sustainable Investing: Resilience amid Uncertainty’, BlackRock explored the performance differences between ESG indices and their core, non-ESG versions. The study also probed how ESG-focused investment funds have fared versus their peers.

As part of the research, the firm constructed a hypothetical long/short portfolio using the MSCI World as its parent universe, which was then positioned long on securities with highly positive sustainability scores according to BlackRock’s research parameters, and short those with highly negative scores.

As the Dow Jones Industrial Average shed some 34 per cent over the course of month during Q1 as the Covid-19 pandemic spread, Morningstar reported that 51 out of 57 of their sustainable indices outperformed their broad market counterparts, the study noted. At the same time, MSCI reported 15 of 17 of their sustainable indices outperformed broad market counterparts.

“In the first quarter of 2020, we have observed better risk-adjusted performance across sustainable products globally, with 94 per cent of a globally-representative selection of widely-analysed sustainable indices outperforming their parent benchmarks,” BlackRock observed.

The deep-dive analysis indicated a correlation between sustainability, and traditional factors such as quality and low volatility.

“Companies with strong profiles on material sustainability issues have potential to outperform those with poor profiles,” BlackRock said in the report. “In particular, we believe companies managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions while still benefiting from positive market environments.”

It was noted that outperformance has also been powered by a range of material sustainability characteristics, such as employees satisfaction, the strength of customer relations, and board effectiveness.

“Overall, this period of market turbulence and economic uncertainty has further reinforced our conviction that ESG characteristics indicate resilience during market downturns,” BlackRock added.

In seeking to rebalance their portfolios amid the turmoil, investors are now increasingly turning to sustainable funds over more traditional ones, BlackRock said, highlighting how global sustainable open-ended funds drew some USD40.5 billion in new assets during Q1, a 41 per cent increase year-over-year.

“In this volatile environment, investors have been seeking to understand what characteristics contributed to comparative resilience in portfolios and how to incorporate these characteristics in their own investments.”

The new findings chime with growing industry research suggesting the use of ESG and sustainable investment themes has boosted performance among hedge funds and other investment products.

Last month, Man Group, the London-headquartered, publicly listed global hedge fund group, said the economic fallout from the coronavirus pandemic is unlikely to derail ESG’s recent momentum.

Man Numeric, the firm’s US quantitative investing unit, developed a set of ESG alpha signals using a range of data providers, which indicated responsible investing factors have boosted risk-adjusted returns in recent years.

Earlier this year, Deutsche Bank’s annual Alternative Investment Survey - which takes the temperature of hedge fund investor sentiment globally – found ESG factors now shape the allocation decisions of almost two-thirds (60 per cent) of hedge fund investors.