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January 12, 2021 | GSAM Connect

Why Invest Sustainably?

Investors today are increasingly focused on incorporating environmental, social, and governance (ESG) factors in their portfolios. In our view, there is a growing recognition that:

  1. The investment materiality of ESG factors has been amplified during the economic and market challenges of COVID-19.
  2. Investors can use ESG factors as part of the process of generating alpha and managing risk.
  3. Demographics and the Great Wealth Transfer are accelerating investor focus on ESG factors.

COVID-19 has amplified the materiality of ESG factors. The idea of being cognizant of a wide range of corporate stakeholders, not just shareholders, has been gaining traction in the US in recent years. In 2019, the Business Roundtable redefined the purpose of a corporation to promote ‘an economy that serves all Americans.’1 COVID-19 has accelerated this trend. Where environmental and governance factors had already been key risk measures, social conscientiousness has become an important source of potential opportunity. 

Businesses that have adapted and prioritized their employees, customers, and communities have weathered the pandemic differently than their peers. Companies that created a safe working environment for their staffs, that changed their production lines to make personal protective equipment for frontline workers, and those that found temporary jobs for their furloughed employees may be in advantageous positions emerging from the crisis.

Demand from investors has followed this shifting dynamic. According to Morningstar data, US ESG equity investments have seen $44 billion in inflows in 2020 while all other equity funds combined (active, passive, and ETFs) experienced -$308 billion in outflows. Globally, ESG fund inflows swelled to $173 billion in 2020. We believe this trend will persist as investors realize the materiality of ESG factors and demographic trends provide a strong tailwind. 

Investing sustainably can be an important component of alpha generation and risk management.
During the stress of COVID-19, ESG industry leaders outperformed their peers during drawdown and recovery. As shown in Exhibit 1, companies with commitments to all of their stakeholders (including workers, customers, communities, and shareholders) outperformed the broader equity market by 13.3 percentage points in 2020. For companies, sustainable business practices can be good for the bottom line. For investors, material ESG factors may enhance portfolio management.

EXHIBIT 1: Industry Leaders Maintain their Outperformance Through the Recovery

Source: Bloomberg, JUST Capital, and GSAM. As of December 31, 2020. Past performance does not guarantee future results, which may  vary.

Demographics and the Great Wealth Transfer will accelerate ESG trends. An estimated $40 trillion in assets is shifting from the baby boomer population to the next generation of millennial, Gen Z, and female investors. These groups are much more focused on investing sustainability than their predecessors. In fact, approximately 70% of millennials expect their managers to screen based on ESG criteria and 76% of women believe ESG factors are important in making investment decisions. We believe this powerful financial force will drive increased demand for ESG investments as well.

When considering building portfolios with a purpose, it is important to remember that ESG does not need to be a separate asset class or a carve out in a portfolio. Rather, it is a part of integrated asset allocation. As shown in Exhibit 2, investors can invest sustainably across a variety of investment options and asset classes from traditional equity and fixed income to private markets.

EXHIBIT 2: Integrating ESG in Portfolios

Source: Bloomberg, JUST Capital, and GSAM. As of December 31, 2020. Past performance does not guarantee future results, which may vary.

Sustainable investing is not a singular act, but one that may enhance portfolio durability in any macro climate. In our view, ESG and impact investing will be increasingly relevant for years to come.

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About the author

Candice Tse

Candice Tse

Managing Director, US Head of Market Strategy, GSAM Strategic Advisory Solutions

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