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Major ESG investment funds outperforming S&P 500 during COVID-19

Some of the biggest investment funds set up with environmental, social and governance criteria are outperforming the broader market during the coronavirus crisis.

S&P Global Market Intelligence analyzed 17 exchange-traded and mutual funds with more than $250 million in assets under management that select stocks for investment based in part on ESG criteria. Of those funds, 12 have lost less value so far this year than the S&P 500. The top performer in the analysis, the Brown Advisory Sustainable Growth Fund, had a negative 5.4% price change in the year through market close April 9, compared to a 13.7% decline in the S&P 500.

Critics of ESG investing often question whether the strategy can deliver premium returns. ESG fund managers said their focus on nontraditional risks led to portfolios of companies that so far have been resilient during the COVID-19 downturn.

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"For us, sustainability is not an end in and of itself; it is a means by which we turn over more rocks, look at more information, and add a complementary lens in order to gain conviction on a company's strategy, operations, and prospects for growth," said Karina Funk, a portfolio manager at Brown Advisory Inc. and the firm's head of sustainable investing, in an emailed statement.

The Brown Advisory Sustainable Growth Fund, which had equity assets valued at about $1.8 billion as of April 9 according to S&P Global Market Intelligence, holds positions in 34 companies including Microsoft Corp., American Tower Corp. and Inc.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Another sustainability-focused fund, Calvert Research & Management's U.S. Large-Cap Core Responsible Index Fund, is down 12.1% this year. The fund held equity assets valued at about $1.9 billion as of April 9, according to S&P Global Market Intelligence.

On a call with reporters April 7, Calvert CEO John Streur attributed the firm's relatively strong performance to its "very limited exposure to the entire fossil fuel value chain," as well as investments in companies with historically strong ESG characteristics.

"Although no companies had criteria for how they would respond to a pandemic, it's clear that companies that had been thoughtful about managing other environmental or social risks were ready for any kind of situation and have reacted quite well," Streur said.

Both Streur and Leslie Samuelrich, president of Green Century Capital Management Inc., said their funds are losing fewer investors than the broader market in part because ESG-focused investors tend to take a longer-term view.

"Our loss is on the market, it's not on redemptions," Samuelrich said in an interview. "I do think values-based investors are stickier, and so if people didn't want to invest in fracking two months ago, they still don't." Investors may be worried when looking at their statements, "but where would they go unless they take it all home?" she asked.

Green Century Capital Management, which is owned by environmental and public health nonprofit organizations, had close to $700 million in assets under management at the end of 2019. The firm's Green Century Equity Fund is down about 10.7% this year.

Coronavirus reshaping some engagement strategies

While ESG funds are exhibiting some resilience so far in the downturn, Adam Gillett, head of sustainable investment at Willis Towers Watson PLC, cautioned against reading too deeply into their short-term relative performance.

"I tend to steer away from placing too much weight on such short time periods, and whilst it's tempting to draw positive conclusions it is worth reining that in somewhat [and] recognizing that sustainable investment is a long-term thesis and these are extraordinary times with various factors at play," Gillett said in an email on April 7.

The unfolding economic downturn is also forcing some ESG investors to reconsider their corporate engagement strategies as many companies struggle just to stay afloat or maneuver to refit their factories to produce needed medical supplies.

"Investor-company interaction needs to be sensitive and understanding, but maintain its discipline and long-term focus where possible," Gillett said.

Fredrik Henzler, a partner at Partners Group Holding AG, said the Swiss private equity firm is postponing some 2020 ESG initiatives for the hardest-hit companies in its portfolio.

"We will see revenue shortfalls in many of our portfolio assets, and we need to manage this liquidity closely," Henzler said during a conference call on April 2. "For other portfolio companies that have been less impacted by the crisis, it will be business as usual in terms of our ESG assessment."