While most assets took a beating during the initial phase of COVID-19, environmental, social and governance (ESG) investments did better than most.
The ESG investment theme isn't new. Even before the virus crisis hit, sustainable investing was becoming a hot topic with investors. It is something that's been in the RBC ethos for a long time.
But recent experience shows that ESG stocks with stronger ESG characteristics are more resilient during bear markets, with most outperforming the market in February and March, Morningstar analysis shows. Between mid-February and mid-March, 66% of ESG funds ranked in the top half of their categories.
“The ESG investment theme isn't new. Even before the virus crisis hit, sustainable investing was becoming a hot topic with investors. It is something that's been in the RBC ethos for a long time”
The influential younger generation
The younger generation’s focus on sustainability is a common topic in client conversations. One client, for instance, was interested in ensuring their entire portfolio had an ESG stance at the insistence of their younger daughter.
According to research from The Economist Intelligence Unit, commissioned by RBC, 76% of the UK’s younger demographics say it's increasingly important to consider ESG factors when investing, compared to 37% of older generations.
Sustainability is cheaper for long-term investing goals
Until the pandemic hit, stocks with good ESG credentials were expensive. However, the recent market pullback has made ESG stocks better value for long-term investors, such as those around health, clean energy, water, waste and food. Indeed, across the ten-year investment horizon, these stocks are relatively cheap now so this could be a perfect moment to add some quality ESG companies to a portfolio.
“Until the pandemic hit, stocks with good ESG credentials were expensive. However, the recent market pullback has made ESG stocks better value for long-term investors, such as those around health, clean energy, water, waste and food”
Embracing investments in these forthcoming trends is a way of readying a portfolio for the coming changes in the global economy. Obvious long-term themes include the move away from fossil fuels to renewable energy, but there's also the increased use of artificial intelligence and new technology to help care for both an ageing population and the environment. Investors can benefit from these trends, and use them to future-proof a portfolio.
David Storm is the head of multi-asset portfolio strategy at RBC Wealth Management. Based in London, he joined the firm in 2008 and has held positions as director of investment solutions and head of portfolio consulting.
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