May 18, 2020, 7:14 AM – Updated on May 18, 2020, 9:20 AM
By Alastair Marsh
BlackRock Inc. added its contribution to a growing body of research showing that ESG portfolios — those that consider environmental, social and governance issues alongside regular financial considerations — outperformed traditional market benchmarks in the recent market downturn.
The New York-based firm, which oversees about $6.5 trillion of assets, said in a research note Monday that 88% of sustainable indexes did better than their non-sustainable counterparts in the first four months of 2020. That comes after those same 32 indexes, which BlackRock says are widely used and represent the global market, notched superior performance to their traditional counterparts during declines in 2015-2016 and 2018.
The rapid growth of ESG funds over the past five years –more than $30 trillion of assets are now managed using a broad definition of the approach — coincided with a period of market calm, causing some to question the resiliency of the strategies and convictions of their managers during a downturn. Asset managers that have established ESG divisions, including Allianz Global Investors and Invesco, have been keen to demonstrate how well sustainable portfolios are weathering the storm.
BlackRock also said it found open-ended funds that rank in the top 10% of Morningstar’s sustainability ratings significantly outperformed the bottom 10%. On average, the most sustainable funds tended to rank in the top half of their peers for financial returns in the first quarter, BlackRock said.
While some have suggested the strong comparative performance of ESG funds is due to the fact that most underweight energy companies, which have been crushed by cratering oil prices, slumping energy values explains “only a fraction of the outperformance,” BlackRock said.
“This period of market turbulence and economic uncertainty has further reinforced our conviction that ESG characteristics indicate resilience during market downturns,” said BlackRock. “Companies managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions while still benefiting from positive market environments.”
Earlier this month, Allianz said the vast majority of its sustainable strategies outperformed broad market benchmarks in the first quarter. In April, money managers at Invesco said that portfolios of securities with high ESG scores did better in general.
However, just four of the 10 biggest ESG-focused U.S. mutual funds have beaten their benchmarks this year as of Friday, according to data compiled by Bloomberg.
BlackRock noted that the resilience of most sustainable portfolios is similar to past periods of market tumult, which is helping the group capture investor attention: Global sustainable mutual funds and ETFs had inflows of $40.5 billion in the first quarter, up 41% from the same year-earlier period.
“These inflows during a period of extraordinary market drawdown suggests a persistence in investor preferences toward sustainability,” BlackRock said. “They upend an oft-cited concern pre-Covid crisis that during sharp market downturns, investors will de-prioritize sustainability.”