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Funds focused on buying stocks that score well on environmental, social and governance-related metrics proved a safer harbour for investors during the coronavirus-fuelled market rout last month, Morningstar data shows.

With trillions of dollars wiped off stock market values during March, there were few places to hide completely for funds only allowed to bet on rising prices, yet investors in funds focused on environmental, social and governance metrics (ESG) lost less money than their non-ESG peers.

Some of that outperformance can be put down to the funds’ typical aversion to sectors which often score less well on ESG metrics and which have been hit particularly hard during the downturn, such as airlines and oil companies.

Data from industry tracker Morningstar showed that actively managed Europe Large-Cap Blend, Global Large-Cap Blend, and U.K. Large-Cap Equity ESG funds, on average, all beat their non-ESG rivals, although U.S. Large-Cap Blend Equity lagged theirs.

All the funds were domiciled in Europe and state in their prospectus that they use ESG criteria as a key part of their security-selection process, or indicate that they pursue a sustainability-related theme or seek a measurable positive impact alongside financial return.

“Companies that score high on ESG tend to be large well-run businesses that treat their stakeholders well, address their environmental challenges, enjoy more conservative balance sheets and have lower levels of controversies. Many such companies tend to be more resilient during market downturns,” said Hortense Bioy, director, Passive Strategies and Sustainability Research, Manager Research, Europe.

The biggest outperformance was in the U.K., where the average ESG fund fell 14 per cent against 16.8 per cent for their non-ESG rivals. All of the passive ESG funds, which track movements in indices, beat their non-ESG peers, the data showed.

“The focus ... on the long-term sustainability of business models and often a focus on firms that are better able to adapt to changes in society is one of the key reasons in my view,” Jeroen Bos, head of specialized equities and responsible investing at Dutch money manager NN Investment Partners.

“These companies are often higher quality as well in combination with often having lower leverage, all factors that help in the current environment.”

Geir Lode, head of Global Equities, International at Federated Hermes, said the changing political and regulatory climate would also likely lead to further opportunities for companies which score well on ESG metrics.

“Companies which play an active role in adapting to and mitigating some of the greatest challenges that we see today in society are likely to be rewarded through future policy and legislation, promoting greater sustainable development.

“This latest crisis will perhaps hasten the speed of transition, and markets for unsustainable products and services will decline.”

Analysts at Bank of America Merrill Lynch said in a March 25 BofA Global Research research note that, from the S&P 500’s peak on Feb. 19, stocks that scored in the top quintile on ESG metrics had outperformed the market by more than five percentage points.

The performance was “nearly identical” on a sector- and size-adjusted basis, they said, while the top 50 most overweighted stocks by ESG funds had outperformed the most underweighted by more than 10 percentage points.

Rob Weeber, chief executive at Zurich-based Tiedemann Constantia, said his firm’s ESG-focused strategies had performed “extremely well” during the period, thanks in part to their lack of exposure to energy, airlines and resource stocks.

“The active allocation to companies such as [technology company] Zoom <ZM.O>, which reduce a company’s carbon footprint and the need to travel, has meant that they’ve held up extremely well.”

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