ESG investments becoming the new safe haven, expert says

In a time of significant market volatility, there are signs ESG-focused investments could well be the new safe haven.

Gold and US Treasury bonds are commonly perceived as safe haven assets.

Safe haven assets are assets investors believe hold or even gain value during economic downturns.

But during COVID-19 investors have been turning to environmental, social and governance (ESG) assets, and in some cases it has been paying off.

Financial advisory firm deVere Group reported that 56 per cent of its clients that sought ESG-oriented investments cited financial protection as a reason for seeking them.

“The majority now say that they perceive ESG investments as the new safe-haven asset class,” CEO Nigel Green said.

“They are increasing their exposure to such funds in a way that traditionally they would have done with, say, gold or US government bonds.

“They would be correct in citing this view. All the latest research underscores that the majority of environmental, social and governance investments have outperformed their non-sustainable counterparts this year and have had lower volatility.”

But do ESG funds offer financial protection? While it is impossible to be certain of future performance, ESG superannuation funds have performed better than non-ESG focused funds during COVID-19.

In May, Rainmaker Information found four of the top five super fund performers were ESG-focused.

One of these funds was Australian Ethical Investment (ASX:AEF) and it announced last week it had continued its positive performance. Its balanced superannuation fund option had generated returns of 2.4 per cent per annum.

It also reported record net inflows of $660m over the financial year and funds under management surpassed $4bn.

Policy needs to change

More super funds are taking steps to capitalise on the ESG opportunity.

Health Employees Superannuation Trust Australia (HESTA), which has $52bn in assets and over 860,000 members, today called on the government to set a 2050 ‘net zero’ emission reduction target.

It believes the target is achievable through investments in things like renewable energy projects, but policy settings need to change.

“While we want to invest more here, for every $1 we have invested in Australian renewables, we have $3 committed to equivalent assets overseas,” CEO Debby Blakey said.

“These assets are in countries that provide stable, predictable policy settings, which have given us the confidence to make long-term investments.”

Blakey warned that beyond locking in long-term emissions, uncertainty would increase the risk of assets becoming stranded. Yet if the government acted, trillions of dollars of global investment would be up for grabs.

“In Australia alone we have an incredible opportunity to attract not only global investment but to draw on the almost $3 trillion pool of superannuation savings to power a green-led recovery from COVID-19,” she said.

“But there is growing global consensus from investors and business leaders about the urgent need to set long-term emission reduction targets.

“By getting the policy settings right, super funds like HESTA would have significant appetite to invest more in renewable infrastructure in Australia.”