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ESG Investing in a Multi-Asset Context: is there a catch?

Market update
Sustainable investments

ESG Investing in a Multi-Asset Context: is there a catch?

Apr 21, 2021

We analysed historical data across stock and bond markets to assess how ESG factors impact performance. Overall, stocks and bonds with higher ESG scores have outperformed over the last ten years, although there are some exceptions and variations. Looking ahead, too, we don't believe there is a trade-off between sustainability and returns. In the long run, companies that mitigate risks and exploit ESG-related opportunities should continue to outperform. One good way to incorporate ESG factors in a portfolio is through a multi-asset approach that actively manages risks and harvests new opportunities.

  • Environment, Social and Governance (ESG) factors have gathered traction in the investment world. Most people are sympathetic to making investments for the best of the environment and society. But sometimes, investors hold back because they're unclear on whether pursuing sustainable investments would hurt performance.
  • There are logical reasons to believe why this might be the case. For example, focusing on ESG investments shrinks the proverbial pond that the investor can fish in, meaning they may miss out on potential opportunities.
  • But we would argue that companies with superior ESG practices – good corporate governance, for instance – are better managed, and better able to achieve strong business and investment outcomes in the long run. 
  • And in the transition to a greener economy, companies that fail to prepare may be caught off-guard by new government policy or consumer behaviours, missing both the related risks and the opportunities.
  • Supporting the pro-ESG camp has been the strong performance of ESG stocks in 2020 (Chart 1), suggesting ESG can boost investment performance. But context is king, and 2020 was a unique and tough year for the global economy thanks to COVID-19. This meant cyclical sectors like Materials and Energy underperformed thanks to the drop-off in demand. 

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