The performance of ESG funds during the Covid-19 pandemic when allied with Gulf Cooperation Council (GCC) governments’ sustainability plans should make them compelling choices for Mena-based investors, according to Aberdeen Standard Investments (ASI).
Amid the stock market crash that resulted from the outbreak of the pandemic, ESG funds proved to be relatively resilient given that companies with better ESG ratings have outperformed the broader market during the first quarter of 2020 and across all regions.
Furthermore, ASI believes that this strong performance could continue post-pandemic if “the world aims to build back better”.
For Mena investors, ESG funds should be of particular interest given that their strong performance tallies well with government plans to improve ESG reporting standards and have a strong focus on sustainability practices.
For example, in Abu Dhabi there are plans underway to introduce ESG criteria for entities within its international financial centre – Abu Dhabi Global Market. Meanwhile Dubai Financial Market launched the UAE index for ESG in April 2020.
According to Edris Alrafi, head of Middle East and Africa for ASI, the fact that ESG funds have so far performed well during the current market sell-off is significant because it is by far the biggest market crisis that these funds have faced.
“Most dedicated ESG strategies were launched after the 2008 financial crisis and so have been beneficiaries of the long bull market that persisted for more than a decade thereafter. Now, however, that bull market has come to a dramatic end. And ESG funds appear to have come through the crash in good shape,” said Alrafi.
However, Alrafi also advocated caution in attaching too much long-term importance to the short-term outperformance of these funds. “After all, the essential attraction of funds that incorporate ESG factors is their focus on the long-term, through good governance and societal and environmental sustainability.
“The short-term outperformance of ESG funds may owe more to their sector positioning than the ESG credentials of their component stocks. For example, the plunge in the oil price, and the boost in the healthcare sector have been beneficial to most ESG funds,” said Alrafi.
Nevertheless, ESG and sustainability-tilted funds have consistently shown less vulnerability to downturns and periods of volatility than traditional funds, said Alrafi. They should also benefit in the medium-term if the ‘build back better’ principle is applied to the economic recovery that follows the end of the pandemic.
“Any moves towards a greener economy should reward the environmental focus of ESG funds. Companies that address social inequalities and adopt responsible business practices will be better placed to adapt to the new world that emerges in its wake,” said Alrafi.
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