A protective portfolio

Hey there, time traveller!
This article was published 02/05/2020 (2032 days ago), so information in it may no longer be current.

Health concerns are top of mind for most folks these days. But it seems more and more investors are putting the health of the planet and their communities at the forefront of their investment portfolios, too.

And this growing penchant for socially responsible investment — or SRI — is paying off, even during the outbreak of COVID-19.

Data from Bloomberg showed in March that equity funds using environmental, social and governance (ESG) strategies only fell about half of the drop in value of the S&P 500, which is the benchmark for U.S. stock market performance.

“From a performance basis, definitely the fossil-fuel free funds are coming out on top right now,” says Tim Nash, an SRI specialist, and founder of the Sustainable Economist blog and Good Investing, which provides guidance on do-it-yourself SRI portfolios.

Indeed that should come as no surprise, given the recent and unprecedented tumult with the price of oil — which shocked the world when the price for delivery of a barrel of oil in May briefly cost an owner about $40 US to sell (not buy!) due to falling demand and a lack of storage.

Consider the MSCI ACWI ex Fossil Fuels Index — which tracks the stock market performance of the largest companies in the world not involved in oil, gas or coal — had a -19.5 return year to date (April 27) compared with its fossil fuel counterpart the MSCI ACWI Index that fell -21.

Sure, the difference in performance is rather meagre.

But “at a very high level two-thirds of the ESG ETFs… are out-performing the largest or most popular vanilla ETFs (exchange-traded funds) in their segment,” says Lara Crigger, senior staff writer with ETF.com in New Orleans.

What’s more it’s not just fossil-free screens resulting in out-performance of traditional strategies. ESG screens generally are generally doing better because they tend to hold best in class companies that are committed to reducing exposure to environmental, social and governance risks.

In short, publicly traded companies embracing ESG tend to have better revenues than those that don’t.

“During these times it’s more important than ever to focus on (responsible investment) principles: clean water, food production, sustainability and gender diversity,” says certified financial planner MaryAnn Kokan-Nyhof with Desjardins Financial Security Investments Inc. in Winnipeg.

She points to the Quebec-based Desjardins as a pioneer in SRI, which encompasses ESG screens to select stocks and bonds.

Desjardins SocieTerra Balanced Portfolio A class—a fund of SRI mutual funds—is a top-10 performer among similar investments for the last year (down about 2.5 per cent). That’s about 5 per cent better than ESG counterparts, and roughly 1.3 per cent superior to a benchmark balanced portfolio of Canadian stocks and bonds.

One explanation for the recent outperformance of SRI, which includes a variety of strategies including investing only in environmentally companies focused like renewables, is it has been increasingly popular among investors.

SRI “did very, very well leading up to the pandemic,” Nash says.

“The first two months of this year, it was the talk of the town.”

He points to many of the largest investment firms in the world focusing more on these principles, which adds momentum to investment in the segment. Nash further notes a recent missive by Larry Fink, chairman and CEO of Blackrock (iShares), the world’s largest investment management firm. In January, Fink wrote climate change — which is often a top SRI focus — was the top concern of investors.

What’s more he noted the industry is now poised for revolutionary change, in which environmental issues progressively dominate corporate strategies.

While progress is happening, Nash is concerned that similar to the Great Recession in 2008-09, in which SRI had been in high demand among investors prior to the meltdown, the Great Lockdown will again put environmentally focused strategies “on the backburner” during its recovery.

Then again, Nash is hopeful the relatively strong performance of renewable energy utilities like Brookfield Renewable Partners LP — traded on the TSX — indicate the tide is finally changing for good.

These more thematically focused SRI investments have been some of the best performers of late.

“Most of them are these thematic, global renewable energy ETFs,” Crigger says.

That’s even despite the fact energy demand is down because the economy is on pause.

“We’re seeing numbers out of Europe that show renewables provided 46 per cent of the power demand last month.”

Even in the U.S, renewables now account for more energy production than coal for the first time in history, she says.

And it’s not because utility companies “are tree huggers,” Crigger says. Renewable energy projects have fixed costs, and long-term contracts that provide cost certainty even in uncertain times.

“You don’t have to pay for the supply of sunshine or wind, whereas you do have to pay for coal.”

Nevertheless we have a ways to go, particularly with getting more of the investing public on board, says Kokan-Nyhof, who began offering her clients SRI portfolios a few years ago.

“We are still finding that we are the ones who have to bring it up with our clients, but once the dialogue is started most people prefer (responsible investment) principles,” she says.

“Most of our clients are definitely feeling better knowing that their investment principles are protecting their downside and protecting the planet.”