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Understand the performance of ESG funds like a pro

Some ESG funds have had a tough time lately, but interpreting the results depends on how you define “ESG funds.”

This slowdown is most pronounced for “ESG funds”, defined as (usually passive) large-cap US or global equity funds, which are labeled ESG because their top holdings are under normal third-party ESG ratings. But in a superficial way, screens well. These funds typically contain companies that have the resources to provide strong disclosures and are fairly carbon lite by Scope 1 and 2 measures. They also have relatively low human capital resources, pay higher wages and suffer from fewer issues related to factors such as workplace safety. These funds have seen disproportionate sell-offs because they are long-term, growth-biased and their valuations have previously benefited from rock bottom low discount rates. So high inflation and low liquidity are headwinds for which they are very vulnerable. On the other hand, value-oriented equities including resources, as well as companies benefiting from easing buildup and supply chain bottlenecks in the capex cycle, have outperformed. In other words, performance has less to do with ESG and more to do with the asset class in which a fund is invested.

ESG-integrated funds, in which ESG considerations are fully taken into account in the context of the risks and opportunities of the investment, can and do span the spectrum of style biases, including price, and include funds that are more sensitive to the current environment. can perform better. ,

Structural Tailwinds for Sustainable Funds

When it comes to sustainable funds, particularly those with a low carbon focus, the rapid trend toward climate change mitigation and global efforts to cut carbon intensity are now structural, and will not be affected much by market rotation. Eighty percent of governments have made decarbonization commitments (versus less than 10% five years ago) and spent on green infrastructure. Additionally, more companies are declaring voluntary net zero or other climate pledges, regulatory pressures are intensifying and consumer awareness is increasing. These developments suggest a major investment theme for decades to come, with capital moving at an unprecedented rate to fund innovations and renewable technologies that can displace high-carbon activities and aid in the ESG transition. . The falling prices of this technology and funding that will remain cheap relative to history will lead to reducing carbon solutions. So while funds with this thematic focus may see some adjustments due to Federal Reserve tightening and general market revaluation, we expect them to correct their positions anchored for a longer-term trend tailwind .

Investors increasingly impact oriented

Lastly, impact-oriented funds, which are based on an alignment of values ​​with clients based on any social or environmental objectives that they wish to fund their money, will certainly be affected by current steps as well. policy, liquidity and market cycles, but should generally be considered as a long-term investment focused on achieving financial returns as well as financing positive change for people and/or the planet. We further note that targeted impact focused on the identification of investment opportunities and topics, such as natural capital, health and inclusion, is becoming more relevant to public equity and fixed income investors. In the past, impact investing was primarily handled through private equity; Recent years have seen an increase in the capacity of public companies that address societal needs, such as the energy transition and agricultural technology advancement. As sustainable and influential investors turn to relevant programs such as the United Nations Sustainable Development Goals to target societal needs, supporting the development of impact strategies, alignment for such initiatives should continue to gain momentum .

Investor commitment to ESG is growing

to the extent that some investors Inactive ESG-labeled strategies may have been mis-sold in recent years as a panacea or magic potion

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