Investments into environmental, social, and governance jumped by 72% this year, says Morningstar.
  • Despite the COVID-19 pandemic and an economic downturn, investments into environmental, social, and governance assets surged by 72% this year, says Morningstar.
  • Investors showed increased interest in ESG-related products before the outbreak and the trend continues.
  • Assets under management in sustainable investment funds reached a record high of over $1 trillion at the end of June.

Despite a global economic downturn brought on by the COVID-19 pandemic, assets under management in sustainable investment funds reached a record high of over $1 trillion this year, says a report by financial services firm Morningstar.

The peak was achieved after investments into environmental, social, and governance assets surged by 72% to reach $71.1 billion in the second quarter of 2020.

Investors showed rising interest in ESG-related financial instruments prior to the global health crisis, says Jon Hale, the director for sustainability research for North America at Morningstar, but the outbreak may have bolstered the global flows of ESG investment capital. 

“I think the pandemic actually reinforces the idea that companies that have done a good job at looking out for their other stakeholders — like their employees, customers and their supply chain — have proven more resilient during the pandemic as opposed to those just trying to maximize shareholder value,” Hale told Karma. 

Hale says research from multiple sources, including a recent report from BlackRock, the world’s largest asset manager, shows companies that take into consideration ESG risk factors have outperformed other companies during the crisis.

For example, Hale analyzed a basket of 26 ESG index funds in the U.S., Europe and emerging markets and those funds have outperformed their conventional funds counterparts so far this year.

Hale attributes part of their success to the fact that ESG funds typically exclude energy company stocks, which have been hard hit by the downturn as anemic consumer demand for oil and gas hurt the sector. More importantly, he says ESG index funds have picked the right mix of assets.

Overall, assets in sustainable investment funds jumped 23% from the previous quarter and reached a record peak of over $1 trillion at the end of June.

ESG investors sent most of their capital flows to Europe, a whopping 86%, while the U.S. came in second place and attracted 14.6% of the money. The rest of the world such as Australia, Japan and Asia, which actually lost some ESG money in the quarter, lagged behind Europe, but Hale says ESG investment flows will eventually reach those regions as well.

Financial institutions and asset managers are chasing after money from investors interested in sustainability matters. The sector created 125 new ESG product offerings in the second quarter of this year, according to Morningstar. Financial players in Europe and the U.S. also continued to take existing conventional products and rebrand them as sustainable funds.

The rush to cater to ESG investors may create challenges for the sector. The U.S. Securities and Exchange Commission has said the ESG sector has no uniform accounting standard and ratings agencies therefore issue widely differing guidance that may be misleading for investors.

Meanwhile, some asset managers that run ESG funds may not be voting their proxy shareholder stake in line with ESG values, say critics.

Hale says that investors interested in ESG matters should watch out for impact reports that detail investment guidelines for the fund, the investment impact and the proxy shareholder voting track record of the financial institution. If asset managers do not offer such a report then Hale says that may indicate “that they’re not quite as fully committed to ESG as others are.”

“All ESG funds are not the same,” says Hale. “Some are clearly more committed to this than others that may see it as more of a supplementary kind of aspect to their overall investment process.”