Bumper investments into sustainable funds this year add to evidence that the pandemic will prove a tipping point for sustainable investing.

Money invested into ESG (Environmental, Social and Governance) funds ballooned to $71.1bn between April and June, according to the data company Morningstar, and pushed the total invested in these funds to over $1trillion.

The figures were quoted in the Financial Times today, with the paper also citing separate data which claimed the amount invested in ESG funds between April and July 2020 was more than the previous five years combined.

Money appears to be following returns, with investors able to see that gains from ESG-focused funds have generally beaten those of equivalent non-ESG funds. Further research from Morningstar, from June, suggests that 60% of 745 ESG funds across Europe have beaten their generalist counterparts over one, three and five years.

The pandemic appears to have added more momentum to this trend, both in terms of returns and investor appetite for ESG. Here at Fidelity, work by our equity analysts during the early stages of the pandemic analysed the stock market performance of companies that ranked highly on Fidelity’s in-house sustainability scores. It showed that they held up much better than companies that ranked poorly.

There may be specific reasons why an ESG approach has outperformed. Avoiding oil companies - which were already dealing with an historic crash in the oil price before Covid-19 hammered global growth and demand - is likely to have boosted ESG funds. There may also be a longer-term trend at play, with investors now seeking out companies with a more clearly sustainable future in light of the pandemic.

To be clear, ESG investments are still dwarfed by traditional funds in terms of size but the gap is closing and there are reasons to think it will close further. Campaigners have been gaining traction with calls for institutional investors to divest money held in industries deemed harmful to the environment. 

It hasn’t been all plain sailing, however, and a proposed ruling in the US could hamper the expansion of ESG there. The Department of Labor has proposed a rule requiring US pension schemes to make investments solely on ‘pecuniary’ factors, and not concerns such as ESG factors. If enacted, the rule is expected to make it harder for funds to invest in ESG assets.

If progress is stalled, it is unlikely to be halted. The trend in developed nations - perhaps hastened by the pandemic - is towards intervention in sectors such as energy and vice where the public good is at stake.

For many investors, investing in ESG is now as much about future-proofing returns as it is future-proofing the planet. Investing via ESG funds is the most practical way for them to gain exposure but, if you are considering investing this way it requires proper understanding of how your chosen fund invests to ensure that you are getting what you expect in terms of ESG credentials. 

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