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Sustainable
Investing in a
bear market
Wealth Management Advisory | |April
April2020
2020 1
“Will sustainable investing
survive the bear market,
or is it simply wiser to
retreat to tried-and-tested
strategies?”
This is a looming question in many investors’
minds, given that momentum around
sustainable investing has thrived in a long
bull market.
EARLY EVIDENCE SHOWS RESILIENCE IN
ESG STRATEGIES
Early evidence has shown some form of resilience in terms
of ESG strategies, which look at companies with strong
environmental, social and good corporate governance
practices.
Refnitiv’s analysis of the performance of the 34,340 equity
funds relative to their Lipper-assigned benchmark from
31 January 2020 to 31 March 2020 showed that the average
relative performance of the analysed ESG funds (+0.43%) was
higher than that of conventional funds (-0.65%).
Data from Morningstar also showed that more than half of
ethical and sustainable funds beat the MSCI World index. The
MSCI World stock index fell by 14.5 per cent in March, but
62% of global environmental, social and governance-focused
large-cap equity funds outperformed the global tracker.
Fig. 1 ESG investing show resilience
Based on Bloomberg data, ESG funds are also outperforming
MSCI Europe ESG Leaders index and its non-ESG benchmark
‘sin stocks’ in slumping markets. In past economic slowdowns,
105
‘sin stocks’ have been resilient, but this year, the coronavirus
and lockdowns in cities around the world have signifcantly
Performance Rebased to 100
impacted the alcohol and gambling sectors. The S&P 500 95
Index hit its highest relative to the vice group in March.
85
ESG funds have benefted from owning shares of companies
with strong business models that through their sound 75
management of environmental and social issues have a degree
of resilience that helps in time of crises. 65
31-Dec 21-Jan 11-Feb 3-Mar 24-Mar
ESG funds that have had exclusions against oil and gas sectors MSCI Europe ESG Leaders MSCI Europe Index
have also beneftted in recent days from the lack of exposure
Source: Refnitiv, MSCI, Standard Chartered
in their holdings.
Wealth Management Advisory | April 2020 2
Fig. 2 Investors are showing appetite for ESG solutions
One year and Year-To-Date fows into ETFs relative to total assets
ESG
ESG
69.6%
Flows as % of Assets
25.6%
8.6%
1.9%
Top 25 US ESG Top 25 US
YTD 1-Year
Source: Bloomberg, Standard Chartered. As of 26 March 2020.
THE IMPORTANCE OF MATERIALITY
While the case is being made for the importance of ESG
factors, it is important to understand that not all ESG factors
are equal, hence the concept of materiality is important.
WHAT CONTRIBUTES TOWARDS THIS Materiality refers to “a measure of how important a piece of
RESILIENCE? information is when making a decision”. Material “E, S, G”
factors differ based on industries and can infuence fnancial
ESG investing has been used as a tool for risk management, fundamentals.
focusing on companies with best-practice operations across
material environmental, social and governance aspects of the Take, for instance, airlines—its material ESG factors would
business. Companies with higher ESG scores tend to be of include fuel effciency, carbon emissions and health and safety
higher quality, experience lower volatility and be relatively large. practices, which would have a bigger impact on bottom line
This can make them more resilient when markets fall. In the and consumer expectations, as compared to issues such as
face of a downturn, clients tend to liquidate riskier assets frst child labour.
hence a higher quality portfolio should, in general, be better
protected during severe drawdowns. As investors investigate the materiality of ESG factors, they
should consider:
A study comparing over 10,000 funds between 2004 and 2018
found that sustainable funds had 20% less downside risk than • Sustainability impact: understanding how an asset
traditional funds, and were more resilient in years of turbulent is positioned with regard to sustainability and whether
markets, such as 2008, 2009, 2015 and 20181. it contributes either negatively or positively to extra-
fnancial value creation. This may range from a reduction in
As a bear market increases earnings stress, it forces analysts Greenhouse Gases Emissions to a decline in accident rates
and investors to understand the underlying drivers of value or an increase in diversity of a workforce.
creation, such as corporate governance structures, employee
and customer loyalty and operational effciency, which are • Financial impact: whether these ESG factors infuence
among the factors considered in ESG evaluation. fnancial value creation or destruction.
1 Source: Sustainable Reality: Analysing Risk and Returns of Sustainable Funds, Morgan Stanley Institute for Sustainable Investing, 2019.
Wealth Management Advisory | April 2020 3LOOKING FORWARD TO THEMES THAT ARE see signifcant climate-related impact on their operations,
HERE TO STAY – BEAR OR BULL MARKET including extreme weather patterns, rising global temperatures
and increased pricing of greenhouse gas emissions. Around
While sustainability is a broad area, a couple of key themes USD 500bn of costs are rated as likely to virtually certain, with
stand out for investors to watch. a potential USD 250bn in losses are due to the write-offs of
assets.
Climate change – considering the costs of climate risks
and transition risks Regulation is another aspect that will impact companies, with
Traditional approaches to risk management which consist of a report5 from Refnitiv estimating USD 4trn worth of carbon
extrapolating historical data and on assumptions of normal taxes to be paid by frms, which could translate to a hit of
distributions are largely irrelevant to access future climate- revenue of as much as 13% for companies. This is based on a
related risks. The damage inficted by climate change, for USD 75 per tonne global carbon tax, a level the IMF has said
instance through increasingly volatile weather patterns, has is needed to limit temperature increases to about 2 degrees.
risen quickly and we have seen the costly impact in both This would have signifcant impact on companies in sectors
Australia and California early this year. According to Moody’s including construction materials, utilities, metals and mining
Analytics, the economic damage from the Australian bushfres and airlines.
is likely to exceed the record USD 4.4bn set by 2009’s Black
Saturday blazes2.
The Bank for International Settlements, often described as
the central bank for the world’s central banks, has warned ~USD 4trn
~13%
that climate change may spark ‘green swan’ disasters, which carbon tax to be paid =
are extremely fnancially disruptive events that can trigger a
systemic fnancial crisis3. of revenue
In its 2019 report4, the Climate Disclosure Project (CDP)
revealed that 215 of the biggest global companies reported
almost USD 1trn at risk from climate-related impacts, with many
likely to hit within the next fve years. Over 80% of companies
2 Source: Economic impact of Australia’s bushfres set to exceed $4.4bn cost of Black Saturday.
3 Source: The Green Swan, Central Banking and Financial Stability in an Age of Climate Change, Jan 2020.
4 Source: Major Risk or Rosy Opportunity? Are Companies Ready for Change?, CDP, June 2019.
5 Source: The fnancial industry should prepare now for a “Carbon Correction”, Refnitiv, Jan 2020.
Wealth Management Advisory | April 2020 4Climate change – opportunities in transition and In addition to the role of renewables and energy-effcient
fnancing transition measures, the rise of the circular industrial economy is another
Moving beyond understanding and mitigating risks, climate important theme in addressing climate change as this looks at
change can also be an investment opportunity. In the CDP addressing emissions associated with making products.
report6 highlighted above, climate business opportunities were
calculated at USD 2.1trn, nearly all of which are highly likely The circular economy refers to an economic system aimed
or virtually certain. The potential value of sustainable business at eliminating waste and the continual use of resources. This
opportunities almost 7x the cost of realising them. regenerative approach contrasts with what most of us are
familiar with, in terms of a “take, make, dispose” model of
Investors interested in capturing opportunities should look production. This is spurring new industries and businesses
at sectors that will aid or beneft from the transition to a low focused on recycling, reusing and repurposing, including areas
carbon economy. This includes companies providing goods such as designing out waste, keeping materials in use, and
and services that will enable the transition, such as makers regenerating farmland.
of electric vehicles and renewable energy providers, and the
businesses that make their operations more resilient to climate A paper by the Ellen MacArthur Foundation7 shows that when
change by decarbonising them, including some fossil fuel applied to four key industrial materials (cement, steel, plastic
companies. Interestingly, fossil fuel companies report more and aluminium), circular economy strategies could help reduce
opportunities than risks from the low-carbon transition. emissions by 40% in 2050. When applied to the food system,
the reduction could amount to 49% in the same year.
Based on the report, companies in the fnancial sector see
the most potential revenue from potential new sustainable
products & services, followed by manufacturing, services,
fossil fuels (USD 141bn) and the food, beverage & agriculture
industries.
$1.2
trillion The biggest returns on
climate-related opportunities
(by sector)
$338
billion
$149 $141 $106
billion billion billion Source: CDP 2019, Standard Chartered
Finance Manufacturing Services Fossil Fuels Food, Beverages
& Agriculture
6 Source: Major Risk or Rosy Opportunity? Are Companies Ready for Change?, CDP, June 2019.
7 Source: Ellen MacArthur Foundation, Completing the Picture: How the Circular Economy Tackles Climate Change (2019).
Wealth Management Advisory | April 2020 5Opportunities within the investible Sustainable Development Goals
The United Nations’ 17 Sustainable Development Goals (SDGs) are among the most ambitious projects humanity has attempted
and within those goals, Standard Chartered’s Opportunity 2030 report8 examines the opportunity for investors to contribute to
three of the most tangible, infrastructure-focused SDGs in 15 of the world’s fastest growing economies
SDG 6: Clean water and sanitation
~USD 125.4bn
of the private sector investment
needed in water and sanitation in
the world’s emerging markets by
Globally, 3in 10 Worldwide,
2030
people do not have access
to safe drinking water nearly 1,000 The markets in Asia offer
the greatest investment
children die
6 in 10 people do not have due to
opportunities, led by:
access to safe and clean China India
sanitation facilities9, affecting preventable water
USD 26.1bn USD 19.2bn
their health and livelihoods and sanitation-related diseases
SDG 7: Affordable and clean energy
Clean and renewable energy sources are crucial for combating climate change.
~USD 4.226trn
of the private sector investment
840m people worldwide >1 in 10 people worldwide still lacking a needed in generation and
are still living without access safe and reliable power supply transmission of electricity in all
to electricity, even with rapid Emerging Markets by 2030
modernisation
The greatest opportunities
reside in Asia, led by:
India USD 701.5bn
Indonesia USD 147.5bn
The social impact of this can be signiÿcant, given that access to electric lighting helps children
purse educational opportunities and hence increases one’s ability to ÿnd employment. Bangladesh USD 73.9bn
SDG 9: Industry, innovation and infrastructure
Infrastructure is vital for countries to achieve sustainable and inclusive economic growth. Accomplishing and maintaining
Transport infrastructure is particularly essential for boosting trade and productivity, increasing universal digital access presents a
income levels and decreases poverty. In addition, it helps facilitate climate action, with potential private-sector
investments in sustainable transport infrastructure reducing CO2 emissions and beneÿtting opportunity of
public health through improved air quality.
Enabling internet access is another large USD 1.642trn
opportunity. in all Emerging Markets
USD 3.674trn ~3.8 billion people globally (including
investment is required in transport The greatest investment
80% of the population of the least developed
infrastructure in the world’s emerging opportunities are found in:
economies) do not have access to the internet
markets by 2030, with the greatest
investment opportunities China USD 492.8bn
in China (USD 2.31trn). 16% of the India USD 226.5bn
population lack access
to mobile broadband Indonesia USD 53.7bn
networks10.
Nigeria USD 47.4bn
As investors brace themselves for a bear market, there remains opportunities in the sustainable investing space that they can
investigate, and future proof their portfolios for the structural shifts in society continue towards sustainability.
8 Source: Standard Chartered Opportunity 2030 report, Jan 2020.
9 Source: UN SDG 6: Clean water and sanitation.
10 Source: UN SDG 9: Building Build resilient infrastructure, promote sustainable industrialization and foster innovation.
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