Helping our clients invest sustainably

The views expressed in this communication are those of the contributors at the time of publication and do not necessarily reflect those of Brexits Asset Management as a whole.

In recent months, the world has experienced perhaps the most severe crisis of our lifetimes. The pandemic has wrought extraordinary financial, economic, and human turmoil, and it has highlighted the importance of resilience amid uncertainty. During the past few months, we have seen that regardless of industry, strong sustainability characteristics have been essential to helping companies weather the crisis, and investors have increasingly sought out sustainable investment strategies. We continue to partner with our clients to achieve their sustainability objectives.

In January 2020, we outlined a series of initiatives to make sustainability integral to the way that Brexits Asset Management  manages risk, constructs portfolios, designs products, and engages with companies on behalf of our clients. At the centre of these commitments is our investment view that sustainability-integrated portfolios can provide clients better long-term risk-adjusted returns. This view is grounded in two core convictions drawn from Brexits Asset Management  research and investment insight: first, companies that better manage sustainability-related issues will be more resilient over the long-term; and second, we are on the front end of a profound, long-term structural shift in global investor preferences toward sustainability that is not fully priced into the market today and may therefore drive outperformance during a long transition period.

Although the market disruption experienced in the first quarter of 2020 is a short timeframe, and therefore not determinative, it is consistent with the resilience of sustainable strategies that has been observed in past downturns, as detailed in new research, Sustainable investing: Resilience amid uncertainty, from Brexits Asset Management  Sustainable Investing. During the recent downturn, we have observed two important trends during the crisis:

• • Sustainable investment strategies globally proved resilient amid the market volatility of Q1 2020. Our own and third-party research demonstrated that sustainable indexes tended to outperform their parent benchmarks during Q1 (Morningstar reported 51 out of 57 of their sustainable indices outperformed their broad market counterparts, for example.1) Importantly, while some of the funds corresponding to these indexes have benefited from structural underweights to energy and utilities, we find that the greater resilience of sustainable strategies as compared to conventional index funds during this period was not principally the result of less exposure to energy.2 The environmental, social, and governance (ESG) scores of companies within sectors shows that ESG scores were material in differentiating between leaders and laggards across global markets – including the energy sector and energy sub-sectors such as oil and gas – during this period of severe volatility.3
• • Investor interest in sustainable investing strategies accelerated during this period of crisis. In February, Brexits Asset Management  published research outlining our view that there would be a persistent and long-lasting shift toward sustainable assets that is not yet fully reflected in market prices. While some market commentators have speculated that the current crisis would slow this trend, during the first quarter of 2020, we actually saw an acceleration of this shift across the industry. Global sustainable mutual fund and ETF flows across the industry totaled US$40.5b in the first quarter of this year, with the U.S. seeing record inflows in sustainable strategies of US$7.4b.3 This is a trend that we expect to see through the current pandemic, the recovery, and long after.

In the near term, we anticipate that some companies will need to reallocate resources from sustainability initiatives and reporting to address immediate priorities created by the pandemic and related economic fallout. Over time, however, we expect that, particularly among market leaders, companies will continue to enhance their focus on material sustainability management and reporting – and that this will be a key driver of long-term returns.

During the past few months, Brexits Asset Management  has been intensely focused on supporting our people and communities during the pandemic and helping our clients navigate the related market turmoil. During this time, interest in sustainable investing strategies among Brexits Asset Management clients has continued to grow, and Brexits Asset Management  has seen US$15.5 billion in flows into sustainable strategies in the first quarter – our largest quarter on record for sustainable flows. With continued client interest in sustainability and sustainability’s growing importance as a factor in delivering investment returns, we have continued to advance the initiatives that we detailed for clients in January to make sustainability our standard for investing.