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Green investing is underperforming, but don’t count it out just yet


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In the past two years, investors have invested in investment strategies for corporate governance and environmental social responsibility.

In 2020, net new assets into ESG funds jumped to $51.1 billion — more than double the year before. According to Morningstar data, ESG funds attracted almost $70 billion worth of new assets last year.

In fact, when allocating funds to invest their money they are now considering much more than the financial return. However, sometimes investing prudently comes with a price. ESG investors see their portfolios decline both relative and absolute this year.

It begs the question: How patient can investors be if ESG funds struggle?

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It’s normal for investors to become impatient when there is a prolonged period of underperformance. According to YCharts data, net flows to ESG-designated funds have been positive this year. However, ESG funds are experiencing significant outflows over the past year. Long-term investors that don’t sacrifice their values in order to perform have plenty of reasons to believe the future is sustainable investing.

ESG funds that include ESG in their investments are experiencing a slow start for this year. The broad U.S. Stock Market is also affected by ESG. S&P 500 IndexPopular proxy for U.S. stocks, the indice is now in correction territory, having fallen more than 10% since 2022.

In today’s market environment, there seems to be very few hiding places. And sustainable funds — particularly those that consider environmental issues — are having even more trouble keeping up with their non-ESG counterparts.

So what is causing ESG’s underperformance this year

Anemic performance has been seen in many areas of the market over the past year. The energy sector has however been a bright spot. Recent supply chain challenges and other geopolitical events have caused oil prices to reach record levels. Thus, the S&P 500 Energy Sector is up over 28% year to date on a price-return basis.

Despite this, tech companies have seen a sharp sell-off as investors expected the Federal Reserve to raise interest rates soon. The S&P 500 Information Technology Sector is down more than 16% this year as a result.

ESG funds’ recent performance has been hampered by this stark divergence between sector performance. ESG funds are known to be more concerned with technology than the energy-intensive sector. These relative positions were profitable in 2021 and 2020, but they are proving to have been headwinds this year.

Every investment strategy is subject to headwinds. Investors shouldn’t abandon their investment strategies when things get tough. Sometimes it is helpful to keep an eye on the longer term and look for opportunities when stock prices are falling.

ESG investors who are long-term can be confident about the future. Below are some examples of ESG investor rewards in 2022.

The pressure mounting upon big companies to take action to stop global warming is increasing as climate change comes into greater focus. Many of the world’s largest companies are working towards net zero carbon emissions — and pressuring others to follow their lead. Amazon, IKEA and other major corporations are pushing for zero carbon fuels in the ocean shipping sector by 2040.

According to BloombergNEF data, the sustainable debt market surpassed $1.6 trillion in new issuance in 2021. The rapidly increasing market could be instrumental in helping companies access finance to achieve their ESG goals.

They may be able to support ongoing diversity efforts and inclusiveness in local communities. In the case of Covid-19, for example, social bonds were crucial in supporting communities. This type of borrowing is usually reserved for vulnerable or underserved groups.

Investors insist on more information from companies regarding how they are managing climate risks. Gary Gensler, Chair of the Securities and Exchange Commission announced that last year it would make use of its authority and require disclosures on climate change. Asset managers push companies to disclose more about climate change, deforestation, and water security, in an effort to improve investment decisions.

Actually, this month the SEC will propose new rules to publicly traded corporations. Companies would be required to provide standardised information regarding their emission levels and climate-related risks. Investors will be able to avoid the companies most susceptible to being affected by climate change. They also can support those who are dedicated to fighting it.

Long-term investors are encouraged to continue on the current course. New corporate policies are being driven by climate change and it is an important component of both the Biden administration’s agenda as well as many countries around the globe. Additionally, social inequality and injustice have been highlighted by the Covid-19 epidemic and Black Lives Matter. Investors who are socially conscious and concerned about the environment will continue to expect more from companies where they invest.

All investing takes patience. ESG investors are experiencing that now — some, perhaps, for the first time. Market trends are often cyclical, which is a good thing. However, the most likely trends that drive sustainable investing will last are those which have a longer life expectancy.

— By Cathy Curtis, certified financial planner and founder and CEO of Curtis Financial Planning