Coming of Age During the Pandemic

There is little doubt that sustainable investing is on a tear. After receiving a record $24.1 billion in net inflows last year, sustainable mutual funds and ETFs in the US attracted that same amount by August of this year. 

We expect that growth to continue into 2021, but the nature of sustainable investing will likely change. The year 2020 may come to be regarded as an inflection point, when sustainable investing shed its perception as a fashionable trend and became a respected investment discipline.

Sustainable Performance Has Been Strong

The coronavirus has been key to changing investor attitudes. Sustainable investment strategies have generally outperformed their traditional peers this year, both when the pandemic sent the market spiraling in March 2020 and in the subsequent rebound. As of September 30, over 70% of sustainable equity funds ranked in the top half of their categories and over 40% were in the top quartile. Their resilience has helped dispel the myth that “sustainable investing” is just a euphemism for underperformance.

The pandemic, along with the western wildfires and the national reckoning with racial injustice, have also given Wall Street a greater appreciation of the kinds of environmental and social tail risks sustainable investors have long cautioned against. Companies that take care of their stakeholders and not just their shareholders are better positioned, in our view, to weather crises and generate long-term value.

We expect to see more traditional investment managers integrate environmental, social, and governance (ESG) analysis into their investment processes going forward. At Fiduciary, this concept has been embraced and embedded into our research process, along with fundamental analysis.

Authenticity Could Be Key for Investors

With the massive inflows into sustainable investment strategies comes the risk of “greenwashing,” the practice of giving otherwise ordinary investment products a patina of sustainability. Authenticity will become a key differentiator. Companies that engage with their stakeholders, disclose ESG data relevant to their financial performance and demonstrate progress on key ESG challenges should stand out. Meanwhile, the managers that are likely to earn investors’ trust will be those that dedicate resources to ESG analysis, articulate its contribution to investment performance, and draw from robust and varied data sources.

A New Role for Regulators

The popularity of sustainable investing may also invite greater intervention from government. The European Union recently adopted a taxonomy of “sustainable activities” that will be used to standardize climate-related corporate disclosure. This is part of a broader regulatory regime that takes direct aim at greenwashing with provisions that come into effect next spring. While US regulators have so far balked at calls for comprehensive ESG disclosure requirements, we expect that to change under a Biden administration.

Financial outperformance, the threat of mimicry and the advent of regulation—what clearer signs could there be that sustainable investing has entered the mainstream?