How have Socially Responsible Investments performed during the COVID-19 crisis?
Stefan Stevanovic, 10 July 2020
As the COVID-19 pandemic unfolded and caused financial markets to gyrate, socially responsible investments (SRI) have so far ended up outperforming their mainstream counterparts. The MSCI World (USD) Index, one of the most frequently referenced indices of measuring global sharemarket performance, has staged an exceptional recovery and is now down 5.8% from the start of the year to the end of June 2020. However, its socially responsible equivalent, the MSCI World SRI Index (USD) has outperformed with a total net return of -1.7%.
In fact, at the worst point when markets bottomed in the latter part of March, the MSCI World SRI Index fared slightly better falling 29.2% vs MSCI World Index that was down 31.8%. Hence, SRI has outperformed on the way down and maintained and extended that outperformance on the way up.
This has always been the strong point and argument for SRI. During periods of great uncertainty and stress, SRI strategies exhibit lower levels of volatility and therefore higher levels of risk-adjusted outperformance.
One then may ask the obvious question of why this occurs. Recall, SRI is essentially a portfolio that emphasises investment in companies that have good environmental, social and governance (ESG) profiles while ensuring traditional return and risk objectives are still met. Companies that contain better ESG profiles tend to be of higher quality. They have good management and corporate governance in place and more sustainable business models. When panic and fear hits markets, investors are more likely hold on to these types of businesses while selling down the lower quality ones. Over the long term, this trend is likely to remain or even get stronger as more and more investors embrace ESG in their portfolio construction.
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