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Ian Chesham: 2020 – The year of the sustainable investor

09 Nov 2020 Expert insight

Ian Chesham from Barclays Private Bank looks at what the pandemic tells us about sustainable investment strategies

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At Barclays Private Bank, when creating our sustainable investment strategies, the most common question we received was, “will I have to give up investment returns?”. Our long-held view is that carefully implemented sustainable investing approaches, including Environmental, Social and Governance (ESG) analysis and integration, can help to identify high quality companies and reduce stock-specific risk – which may enhance investment portfolio returns.

The COVID-19 pandemic and its economic implications have provided the perfect case study to test this approach. In March 2020 we saw the greatest market correction since the Great Depression with some of the world’s largest economies partially shut down. It was companies with strong business resilience and robust balance sheets that were able to weather the storm and outperform their peers. This market sell-off was not driven by financial exuberance, oil shocks or even Brexit. Instead, it was created through an external shock that no one other than foresighted virologists could predict. The immediate fallout in capital markets caused by this extreme event reminds me of a quote from Warren Buffett: "only when the tide goes out do you discover who's been swimming naked." When Buffett made this quote he was referring to the exposure of overly-indebted companies during times of crisis. However, for this crisis, we believe that another variable exposing some businesses has been the quality of their non-financial metrics, otherwise known as their ESG credentials. 

We have seen examples of companies that pre-crisis had already instilled a disciplined approach to health and safety and were therefore able to operate throughout the crisis with minimal disruption. In addition, businesses that had long embraced the concept of dynamic working to accommodate different working patterns were better equipped when lockdown struck.  More efficient homeworking and forced investment in digital capability has meant that some companies have been able to maintain and even increase productivity for certain roles and professions. As the COVID-19 crisis continues, we are witnessing how those companies most proficient at adapting their working practice, have taken the opportunity to further compound their competitive advantages, often leading to share price appreciation.

To highlight the performance of sustainable investment strategies this year, a recent Morningstar report revealed that:

  • Over the 10 years through 2019, nearly 59% of surviving sustainable funds across the categories considered have beaten their average surviving traditional counterpart
  • Sustainable funds, during the COVID-19 sell-off, delivered superior returns in all but one category compared to their traditional counterparts.
  • In the first quarter of 2020, 51 out of 57 of the Morningstar sustainable indices outperformed their broader market counterparts .

More recently, a US-based study found that sustainable equity funds outperformed their traditional peers by a median of 3.9% to the end of June 2020, and U.S.-based sustainable taxable bond funds outperformed their traditional peers by a median of 2.3%.

In the fixed income market, green bonds and social bonds have had a record $332bn overall issue size year-to-date. Our anecdotal experience has been that traditional fixed income analysis does not always identify these bonds, thereby missing out on enhanced returns. We have seen an increasing issuance of sustainability-linked bonds which consider the overall performance of the company when it comes to ESG targets. A recently issued bond includes a contingent step-up of coupon of 25bp with the step-up triggered if the company does not meet its sustainability targets by 2022 (Barclays Private Bank, 14th October 2020: Daily Talking Points). These types of bonds fund the transition of industries and also provide a financial incentive on the company to do so and as such align investors and company interests.

At Barclays Private Bank, our moderate risk multi-asset class sustainable strategy has performed well, driven by our stock selection, a key element of which is our ESG factor analysis. We believe that fundamental analysis of a company’s financial position is important, but as this year as shown us, incorporating non-financial information can have a positive impact on share price performance. It is these non-financial metrics which may not have immediately obvious or predictable benefits but when effectively embedded into your investment process, can provide a useful indicator of potential risks and quality. This will become even more valuable to investors as company ESG disclosures continue to improve and spread to more jurisdictions and asset classes. 

We envisage a scenario in the not-too-distant future where investors won’t be asking why should we invest sustainably, but rather why are we not already?

Ian Chesham is Director, Charities & Not-for-Profits at Barclays Private Bank

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