Sustainable Investing Resiliency in Light of COVID-19

The past couple of months have been challenging as the world struggles to adapt to the spread of the COVID-19 virus. The health crisis has directly impacted millions, and mitigation efforts to slow the spread has led to an aggressive slowdown in economic activity due to significantly lower consumption and other economic disruptions.

Within this setting, investors that have demanded greater transparency about how and where their money is invested have seen their investments perform better than conventional investing approaches while knowing their investments are promoting positive change.¹

For many of today’s investors, the way they invest matters, and sustainable investing offers the opportunity to build wealth responsibly without sacrificing investment principles. One may have heard it called several different things, but sustainable investing is an approach that incorporates environmental, social, and governance (ESG) issues when building investment portfolios, while also encouraging companies to improve their own ESG risk management practices. In the midst of the COVID-19 global pandemic, sustainable investing continues to be a force for positive change, changing the investment industry, improving companies, and helping communities.

How sustainable investing is changing the industry

Sustainable investing has helped change the investment industry by challenging, and then adapting, traditional approaches in the investment decision-making process while creating greater transparency and adding investment options in the process. The end result has been a large opportunity set of sustainable investing strategies that have two overall goals – to protect or enhance long term value by addressing ESG risks and opportunities, and to protect, enhance, or otherwise positively impact the long-term health of the environment or society.

During the first quarter of 2020, sustainable investing equity funds held up better than their conventional peers. Seven out of ten sustainable equity funds finished in the top halves of their Morningstar Categories, and 24 of 26 environmental, social, and governance-tilted index funds outperformed their closest conventional counterparts.¹ A primary feature of sustainable investing strategies is what is referred to as ESG incorporation, or incorporating ESG issues when building investment portfolios. This process leads to an emphasis on companies that exhibit better ESG ratings relative to their peers. These companies typically have fewer hidden risks (i.e., referred to by investors as off-balance sheet liabilities) and are more resilient to unexpected events (i.e., referred to by investors as black swans).

Sustainable investing making improvements within companies

Sustainable investing can also be seen making improvements within companies themselves through shareholder engagement. Active engagement by shareholders can encourage more responsible corporate practices while discouraging those practices that may lead to increased exposure to risk.

In the early stages of the COVID-19 global pandemic, sustainable investors used their relationships with company management for the benefit of the greater good. One group, led by Domini Impact Investments, Interfaith Center for Corporate Responsibility, and the Office of the New York City Comptroller — which included 195 investors representing nearly $5 trillion — provided a benchmark for the business community on topics such as paid leave, health and safety of workers, supplier/customer relationships, and financial prudence.²

Making changes within the community

Sustainable investing has also been at work positively changing communities through community-oriented investing. This type of investing brings capital directly to underserved communities that conventional markets do not reach, such as low-income neighborhoods and rural communities.

One approach is to invest in government-backed securities that target low and-moderate-income communities, which presents both the potential for social benefits to underserved communities and economic advantages to investors. One sustainable investing strategy had a significant allocation to agency MBS where the underlying loans were to homeowners making less than 80% of area median income. As part of the stimulus package, mortgage giants Freddie Mac and Fannie Mae instructed lenders to be more flexible with borrowers, allowing forbearance or modified payment plans. This provided much-needed relief to the individuals the strategy seeks to support, but the agency backing of the underlying loans provided investors with assurance that regardless of divergence from standard payment schedules, they will continue to receive the expected principal and interest each month.³ As a result, the strategy’s holdings of primarily AAA rated agency-backed securities held up much better during the recent market volatility while many other areas of the bond markets, such as corporate and high-yield bonds, declined.

Get further details

For further details on how sustainable investing has been a resilient investment strategy in light of the COVID-19 pandemic, please see Impact of COVID-19 on Sustainable Investing.

¹ Sustainable Funds Weather the First Quarter Better Than Conventional Funds, Morningstar, April 3, 2020

² “Investor Statement on Coronavirus.” Domini. March 26, 2020

³ RBC Access Capital Strategy Update. RBC Global Asset Management. April 1, 2020.