Whereas European equity funds suffered substantial outflows during the coronavirus crisis, their ESG counterparts held up much better. Moreover, the assets under management are now higher than at the start of the year. This is partly due to the arrival of investors who had never thought of ESG investing before, says Michael Lewis of asset manager DWS.
Lewis has been responsible for ESG thematic research at DWS since 2015. Previously, he was head of commodities research at Deutsche Bank.
According to Morningstar, 62% of sustainable global equity funds in their category were among the 50% best-performing funds in the first quarter of 2020. In fact, 29% were top-quartile. This is partly due to their generally underweight position in the energy sector, Morningstar noted.
Lucky
Lewis agrees that ESG investors have been somewhat lucky, as their overweight positions in technology and healthcare companies paid off handsomely. However, in addition to the positive contribution of the underweight in energy, the stock selection of ESG investors also made an important contribution to outperformance, says Lewis.
‘However, the short track record of ESG investments complicates matters. It’s not possible to compare the results of ESG strategies on a 20- or 30-year basis. That’s a challenge, because long-term investors do need it,’ Lewis admits. ‘Yet it is not only this year that ESG investments are performing well. Last year and the year before, ESG funds also outperformed their traditional counterparts.’
Luxury
Lewis suddenly sees a new type of investor embracing the category alongside traditional ESG investors, which is driven by a number of years of outperformance. ‘These are often people who had not even looked at ESG before, for a variety of reasons. Ten years ago, ESG was still a luxury many investors thought they couldn’t afford. Now they realise that ESG has a lot to offer. To make the world a better place, but also in terms of return.’
European clients continue to be the frontrunners, encouraged by regulatory changes such as the EU’s green taxonomy. ‘European pension funds also feel they are under the spotlight, while in Asia and America many discussions still need to be held and clients still need to be convinced of the added value of ESG,’ Lewis notes.
It’s not just the clients of ESG providers who still have something to learn. Providers themselves also have steps to take. At DWS some of the investments are ESG-proof, but not all. ‘We try to introduce ESG in all parts of the company, but that doesn’t happen overnight,’ says Lewis.
Top Dividende
The high investor demand for ESG products is of course an important stimulus for asset managers to launch sustainable strategies. DWS is no different in this respect. It launched an ESG-share class of its flagship fund Top Dividende in 2017. ‘This share class outperformed the traditional fund last year. You could consider transferring investors from the non-ESG share class to the ESG share class.’
But how many of DWS’s assets under management are actually ESG-proof? That depends on your definition of ESG, says Lewis. ‘Having specialised ESG funds is different from having a standard fund with ESG integration. If you add up all our assets in special ESG funds such as a SDG fund, green bond funds and alternatives such as real estate, it’s almost €70 billion. That’s about 9-10% of our total assets under management - so not that high. But if you add the strategies with ESG integration, it’s €520 billion, or 68% of the total assets under management.’