Figure 1 depicts the underperformance of the headline MSCI ESG Leaders indices across the major developed market regions compared to the MSCI World market index year-to-date in 20221. Even though severe geopolitical tensions, spiking inflation and recessions fears have hurt global equity markets as a whole, the underperformance of sustainability indices has clearly been a trend change compared to previous years2.
Market segments that have performed well, most notably fossil fuels, tobacco and defense, are commonly excluded by ESG investors, which probably explains a large part of today’s sustainability underperformance (Figures 2 and 3).
Recent weaker sustainability performance has without question once again sparked the debate around whether ‘doing good’ equals ‘losing money’, implying there is a natural trade-off between the two. Ideally, we want to create both wealth and well-being, but obviously sustainability strategies sometimes have competing priorities. Examples include climate concerns versus the social costs of high energy prices, or investing in defense companies during geopolitical turmoil.
It is also clear that coming out of the Covid pandemic and with a war waging on the European continent, the world does look different this time – one in which sustainable investing has to evolve as well to better navigate increased market volatility.
As such, we could argue that sustainable investing is experiencing at least a ‘healthy’ reset in which mainstream assumptions about, for example, the effectiveness of strict exclusions but also ESG ratings are challenged. More sophisticated, practical approaches that apply more nuance and context will likely see increased market appetite.
The recent dwindling market appetite for sustainable investing clearly shows in strategy flows too. While sustainability has been the standout story of strategy flows in recent years, that trend has arguably weakened in recent months (Figure 4). For example, inflows into ESG strategies stood at USD 13 billion in May 2022, which is an over 70% decline compared to the USD 46 billion from a year ago.
Figure 5 shows a further breakdown of the drop in ESG flows across regions, asset classes and investment strategies. That said, for the first time since late 2021, inflows are ticking up again slightly, in particular for active European ESG equity strategies.
So where to go from here? Given that ESG has different colors and flavors, sustainable investing, too, is not defined in one particular way. In practice, asset owners and investors can choose the sustainability strategy most suitable to reaching their specific objectives, whether that is more impact-oriented, best-in-class ESG, exclusion-based, or more mainstream ESG integration, to name just a few. And even within each of those categories, there’s often room to maneuver in which sustainability objectives do not necessarily have to bite investment returns. The question is how?
In today’s market environment, fund managers’ fear of misaligned exposure and, conversely, desire to mitigate volatility from crowded ESG positions is high. As such, a better balance between growth and value is required. To that end, we favor an approach of owning quality companies at a reasonable price on one hand and value exposure on the other hand as an inflation hedge. In other words, owning quality businesses underpinned by strong sustainability strategies, while getting exposure to ESG improvers on the value end of the spectrum, gives flexibility whereby sustainability is not necessarily ‘sacrificing’ returns, or vice versa.
In the context of sustainable investing such a barbell approach is often referred to as “ESG integration,” something successfully explored by, for example, the Robeco Sustainable Global Stars Equities strategy3. Core to this strategy is the integration of financially material ESG factors into the investment process.
In other words, sustainability that directly impacts the valuation of a company, i.e., by altering its growth outlook, profitability, risk profile or overall competitive positioning. In practice this means the strategy not only looks for high positive impact companies, but also invests in companies that are riskier as far as ESG is concerned– as long as this is also reflected in the financial model and thoroughly addressed with company management through engagement.
Overall, every market environment brings new opportunities, also for sustainability investors. Within the wide range of sustainability strategies clearly some are more constrained than others, feeling the pain from sectors exclusions and factor exposures that until recently helped drive performance. Therefore, it becomes increasingly important to move sustainability beyond the stage of being a nice narrative alone and also stay valuation-disciplined by not overpaying for ‘good’; companies.
Going forward, we do not see the market appetite for sustainable investing suddenly disappearing. Despite seeing strong inflows for many years, still only a few percent of global assets under management are classified as ESG4, a number poised to go up over time given structural societal and regulatory support for sustainable investments5. Examples of the latter include the EU Taxonomy, a framework targeting environmentally sustainable activities, but also the EU’s more recent initiative to draft a Social Taxonomy, both of which are meant to re-direct and accelerate capital flows towards sustainable strategies6. In short, despite weakening sentiment as of late, the structural underpinnings for sustainable investing still seem very much intact.
Today’s market environment, however, has taught us an important lesson; change is a constant. There is no free lunch – also sustainable investing has to advance to the next stage in its life cycle. Changing market dynamics demand a move away from simplistic, superficial sustainable approaches towards ones incorporating more forward-looking, nuanced insights and more thoughtful engagements. Ultimately, this should not only effect positive change with companies, but also make sustainable strategies more robust in navigating different, more complex market environments.
1 Data from 3 January to 20 June 2022.
2 Until Dec-2021, the MSCI World ESG Leaders outperformed MSCI World by 4.3% and 4.5% on a 3- and 5-year horizon, respectively. Source: Bloomberg.
3 As of end-May 2022, excess performance over a 1-year, 3-year and 5-year period are 1.2%, 4.1% and 2.9%, respectively. In measuring the impact of ESG on investment performance for the Sustainable Global Stars Equities strategy, it turns out that between 2017 and 2021, around 20% of the strategies excess returns can be attributed to the way the strategy integrated ESG. Source: Robeco, June 2022.
4 Source: Barclays ESG research, ESG strategy flow update, June 2022.
5 “Evolution in a Secular Story”, Morgan Stanley ESG research, June 2022.
6 Source: https://www.unpri.org/policy/eu-policy/eu-taxonomy, June 2022.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.