Year of the Ox reflections: ESG investments show their staying power
Every Chinese New Year, AsianInvestor makes 10 predictions about the economic, political and financial developments that could impact global markets and asset owners.
One year on, we review these forecasts to see how well we did it. This reflection examines Year of the Ox outlook: Will 2021 be the year for ESG?
Answer: Yes
Verdict: Correct
2021 was not only a year in which ESG funds grew rapidly, but also a year in which Asia ESG investments outperformed their global rivals despite the region lagging on disclosure and regulatory developments.
“In Asia, ESG screens have been successful in delivering a competitive risk/return profile over the past five years. All of Morningstar’s Asia-focused sustainability indexes both outperformed their non-ESG equivalents and lost less during weaker markets from 2017-2021,” according to Dan Lefkovitz, Morningstar Index strategist.
According to the latest report by Morningstar, in calendar-year 2021, 66 of Morningstar's 116 ESG indexes (57%) outperformed their non-ESG equivalents.
Even when viewed through a longer-term lens, ESG-oriented investments performed quite well relative to their non-ESG counterparts over the five-year period ended Dec. 31, 2021. Some 88 of the 110 (80%) Morningstar ESG indexes with five-year histories outperformed.
“Contrary to conventional wisdom, investing based on environmental, social and governance criteria does not necessarily mean sacrificing return. Nor is it a guaranteed route to market-beating performance. Sustainable investors should be encouraged to see that long-term ESG performance has been competitive and linked to lower risk,” he added.
Big institutional investors names, meanwhile, also heavily added exposure to ESG funds.
Investments by sovereign wealth funds in the ESG space surged to $22.7 billion (see chart below) at the end of last year from $7.2bn reported in 2020, according to Finbold.com and Global SWF. The number of sustainability-linked investment deals at the end of 2021 also rose to 37 from 19 a year earlier.
