ESG Focus: Trigger Fingers Out For 2021 But For Which Classes?

ESG Focus | Feb 02 2021

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

ESG funds ballooned in 2020, as investors sought safe havens from covid and the Saudi-Russia oil price war but 2021 is a different story. Vaccines are rolling out, the green-stimulus led transition is set to barrel down; and investors are reassessing their priorities.

ESG Focus: Trigger Fingers Out For 2021 But For Which Classes?

-ESG: 2020 in review
-Rotation on cards but long-term outlook is "exceptionally bullish" say heavyweights
-Best-in-class versus impact investments for 2021
-Massive green bond stimulus to flow to the worthy

By Sarah Mills

Credit Suisse, announcing its expectations of a supercycle for Chinese equities in 2021 late last year, also forecast a rotation out of ESG stocks in 2021.

There were very few specifics in the forecast to guide investors. For example, would the rotation be out of “best-in-class” stocks, or “impact” stocks. Or perhaps a combination of both, depending on whether the stocks in question are growth stocks given Credit Suisse also forecast a rotation from growth stocks into value stocks in 2021 (in line with many others).

FNArena hasn’t had much luck prising these details from Credit Suisse, but following are our observations.

ESG: 2020 in review

ESG stocks experienced a massive and record inflow of funds in 2020, aided by covid. Funds rose four-fold in Britain alone.

The area was perceived as a safe haven during a period of extraordinary circumstances and as a hedge against the collapse in oil prices following the Russia-Saudi price war.

Investors jumped out of airlines, oil and gas companies and financials, and into a range of stocks with low exposures to the most volatile sectors: strong “best-in-class” ESG credentials; and “impact” stocks serving less exposed sectors such as health and technology. 

Many of the ESG stocks were “growth” stocks, and “best-in-class” stocks also managed to post strong relative growth.

One could expect some of these gains to be reversed as economies return to normal, pending a successful rollout of vaccines.

The global landscape shifted in the last quarter of 2020 after the US election and the roll-out of covid vaccines globally raised the prospect of a return to business as usual. 

Many growth stocks backtracked in December, only to recover by early 2021.

Long-term outlook is exceptionally bullish – especially for transition investments

Despite forecasting a 2021 rotation, Credit Suisse stressed that it was very bullish on ESG long-term. This sentiment is echoed by other global heavyweights.

Blackrock CEO, Larry Fink, in an open letter in January, advised that the climate transition presented a “historic investment opportunity”.

He described climate investment in particular as a “Tectonic Shift” and forecast that ESG investment would accelerate.

"I believe this is the beginning of a long, but rapidly accelerating transition – one that will unfold over many years and reshape asset prices everywhere,” said Fink.

“We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.”

Meanwhile, some predict a US Biden administration will yield an unprecedented boom for ESG investments in 2021.

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