ESG Investors Brace for Bear Market Test Amid Global Stock Rout

(Bloomberg) -- The opening salvos of the global oil-price war took down ESG stocks, along with everything else, in the market carnage.

The Bloomberg SASB U.S. Large Cap ESG Index has minimal exposure to fossil-fuel companies but still dropped as much as 7.2% on Monday, almost matching the 7.4% decline of the benchmark Standard & Poor’s 500 Index. The ESG gauge has plunged 17.7% from its peak on Feb. 19, compared with the S&P 500’s 16.7% slump.

Fear gripping investors could provide a crucible for ESG funds, most of which have never faced a bear market. What’s more, most managers have never had their commitment to environmental or social concerns run into the pressures of falling prices and panicked clients.

“ESG investing as we know it is relatively new and hasn’t been tested in a real-life market downturn scenario,” ESG investment research firm Sustainable Market Strategies said in a report published last year. “Some might argue that when times get tough, asset managers tend to focus on their fiduciary duty and will want to avoid screening out stocks based on non-financial data.”

Today’s 30% crash in crude prices, prompted by concerns that Saudi Arabia and Russia will flood the market with cheap oil, may be a turning point for money managers who adhere to environmental, social and governance investment principles, said Garvin Jabusch, chief investment officer of Green Alpha Advisors, an ESG asset manager in Niwot, Colorado. The oil rout is “a wakeup call for investors that maybe this isn’t a place to have a lot of exposure,” he said.

Most ESG funds have limited investments in fossil fuel-related companies. For example, Parnassus Core Equity, the largest ESG-focused mutual fund, with $17.1 billion of assets at the end of February, had no energy and utilities equities holdings as of Dec. 31.

Before today’s slide, the Parnassus fund had fallen 10.9% in the past 12 trading sessions, compared with the 12.2% drop of the S&P 500 in the same period, driven by the economic fallout of the coronavirus.

The slump in oil prices may slow the energy transition by making low-carbon alternatives more expensive relative to oil-based technologies, creating a headwind for sustainable-energy companies.

“This could become a true test of ESG, in the sense that heightened uncertainty and heightened complexity tend to really focus the mind and investors will need to carefully weigh the value of each investment,” said Harald Walkate, head of corporate social responsibility and ESG at Natixis Investment Managers in Paris.

Investment firms are facing growing pressure from shareholders and employees, as well as activist groups, to use their vast resources to tackle climate change and other environmental and social problems, prompting many of the biggest financial companies to announce commitments to ESG. Even so, responsible investment campaign group ShareAction said Monday that 38 of the world’s largest asset managers, which manage a combined $36 trillion of assets, are “neglecting the ecological and social harms of their investments.”

The collapse in oil prices sending shocks through global markets on Monday highlights the risks where supply is controlled by a handful of resource-rich countries. It also lends greater credibility to the growing sustainable finance movement, which, by one definition, totals more than $30 trillion and is gaining growing support among the world’s largest investors, according to the strategy’s advocates.

Big price swings in the oil markets are almost certain for the foreseeable future and will serve “as a warning to investors as to how risky it may become to invest in high-cost, highly-levered oil producers once we pass the point of peak oil demand,” said Nick Stansbury, head of commodity research at Legal & General Investment Management in London.

--With assistance from Emily Chasan.

To contact the reporter on this story: Alastair Marsh in London at amarsh25@bloomberg.net

To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net, James Hertling

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