It’s been a tough couple of years for sustainable investors. After strong performance for the sector in 2020, there’s been something of an ESG backlash – driven by the energy crisis in Europe, divisions over energy policy in the US, and underperformance of ESG-labelled funds.
Russia’s war with Ukraine, higher interest rates, high energy costs and sectorial biases – ESG funds have typically been more exposed to certain sectors, such as technology and growth stocks – meant there was a defined reversal of fortunes for sustainable investors in 2022 and 2023.
At the same time, sustainable investors are becoming more discerning. So much so that under pressure asset managers have been rowing back on their sustainability proclamations – also known as ‘greenhushing’ – for fear of being accused of either ‘greenwashing’ – conveying a false impression or providing misleading information about how a company’s products are environmentally friendly – or overpromising on their ESG credentials.
All of which has left the sustainable investing industry as a whole to grapple with how to reassure clients. Yet, while 2022 was a stress test year for ESG, it’s important to remember the years of outperformance between 2010 and 2020 set against the non-ESG performing sectors following Covid and the Russia-Ukraine war, said Léa Dunand-Chatellet, Director of Responsible Investment at Paris-based investment manager DNCA.
“In this context, the performance of SRI and impact funds is not bad, especially when half of the listed companies that outperform are not eligible for these strategies,” said Léa.
Riffing off a similar tune, Hervé Guez, Global Head of Listed Assets at sustainability specialists Mirova, said that the nuances of sustainable investing need to be properly weighed up. “[Sustainable investing] is a complex investment style, where it is necessary to deliver both financial and non-financial results,” he said.
“The approach aims to improve the extra-financial aspects of companies, which would perform better in the long term. Our investors are also looking for real impact, and they accept financial performance similar to that of the market.”
Reality check
While fund managers need to address short-term performance issues, there’s no avoiding the fact that climate-related threats will continue to dominate the risks posed to global populations.
As Laura Kaliszewski, Head of Client Sustainable Investing at Natixis Investment Managers, pointed out, the World Economic Forum’s Global Risks Report 20241 found that extreme weather, critical change to Earth systems, biodiversity loss and ecosystem collapse, natural resource shortages and pollution represent five of the top 10 most severe risks perceived to be faced over the next decade.
“Climate change is clearly going to continue to be a key determinant of economic growth and one of the biggest drivers of policy decision-making and social change over the coming decade,” said Laura. “Massive investment will be needed, and this will require close cooperation between the public sector and the private sector, government, NGOs, companies, and, of course, the financial sector.
“And while there's been a lot of progress on regulation, on disclosure, on transparency, on reporting, there is still much more to do to address the pressing issue of the transition. All of which is creating risks that need to be integrated, but also opportunities for our clients, and the duty for us to work with them to provide solutions for a more resilient, and sustainable world.”
Nathalie Beauvir Rodes, Head of Sustainable Bond Analysis and Research at Paris-based Ostrum AM, added: “Our clients believe that the bond market can play a key role in the energy transition, and they prefer the integration of ESG criteria in the management of their assets. This integration reduces our investment universe and our diversification, and exposes us to a sector bias, which can have a negative impact.
“However, the temporality of performance and the sector bias do not affect the long-term performance of the portfolio. In addition, ESG integration allows us to de-risk our portfolio, by investing in [securities] that will be less risky tomorrow and to avoid stranded assets.”
For active managers, there’s an opportunity to swim against the tide of pessimism and let their authentic green credentials shine. After all, while other sectors and asset classes ride the volatility wave, true sustainable investing sets its sights beyond the immediate horizon.
As Laura put it, “Despite the ESG backlash, climate change is happening and there is no turning back”.
This article is based on the views captured during the Thought Leadership Summit in Paris in March 2024. Ostrum AM, DNCA and Mirova are all affiliates of Natixis Investment Managers, and form part of our Expert Collective.
