During financial crises, the majority of ESG index portfolios provided better relative returns compared to broad markets, - UBS Asset Management research reveals. According to the report ‘Resilience amidst market drawdowns’ most ESG indexes follow a consistent pattern of risk mitigation during market correction and outperform in the longer term. This outperformance applies to almost every market correction seen in recent years.
This is an important reason for investors to increasingly label sustainability as a competitive advantage for companies, says Marcel Danen, Head Passive & ETF Specialist Sales at UBS AM.
“Institutional investors and wealth managers are supportive of the idea of improving the ESG impact of their portfolios, but they often have a fiduciary duty to prioritize financial performance. More and more data indicate these two objectives can be well-aligned. Examining the recent drawdowns reveals that the great majority of equity ESG indices mitigated downside risks during the coronavirus drawdown period.”
Corona crisis is a perfect testcase
According to UBS AM this supports the hypothesis that ESG portfolios are more resilient to economic shocks because companies with strong ESG profiles can better adapt and respond during crises. Danen: “The Coronavirus period represents a very good test case because it is the deepest market correction since the inception (live-track) of main ESG indices.”
UBS AM’s most important conclusion is that all variants of EGS indices based on the MSCI World and MSCI ACWI outperformed the standard ‘parent’ indices, Danen says. «For example, the MSCI World SRI 5% Capped Index delivered a relative outperformance as high as 257 bps. These global indices (World, ACWI) deserve the most attention because they approximate the broad equity portfolio held by a globally diversified investor, who may in addition employ regional tilts.”
Dark green
In addition, the analysis shows that dark green ESG criteria generally provided higher returns relative to the light- or medium-green approach. “It means that while ESG exclusions made a positive contribution, it was in fact the selection of companies that are leaders in ESG compliance that have made the largest difference. It is noteworthy, that even the medium green MSCI World ESG Leaders Index delivered only just above half of the outperformance compared to outperformance delivered by the dark green SRI index (+136bps vs +257bps respectively). It was the ESG excellence that mattered the most.”
Sustainable investing approach has also provided downside reductions during previous market corrections, so it emerges as a consistent pattern, Danen ads. “This finding is crucial because reducing the downside has much value for investors. Analysing historical drawdowns of above 15% since 20071 reveals that in most cases, SRI 5% Capped indices outperformed the broad markets Across the full range, we can see outperformance in 19 out of 24 ‘period-geography’ cases.”
Better long-term results
ESG indices have also delivered outperformance over regular bull markets, concludes Danen. «For example, the MSCI World SRI 5% Capped index has outperformed the regular index by 129 basis points a year on average over the past five years. In the case of Eurozone equities, this was even 431 basis points per year. In addition, more and more investors want to step into sustainable investments from a social point of view. As far as performance is concerned, there is in any case nothing that should stop them.”
Please find the full report from UBS Asset Management here: ‘Resilience amidst market drawdowns’.