Buy into sustainable opportunities

Sustainability has increased in relevance, and there are numerous ways to gain exposure to it.

At a glance

In response to the COVID-19 pandemic, the initial short-term setbacks for environmental sustainability, such as an increase in single-use products for hygiene reasons, have been counterbalanced by the scope of commitments from many governments to ensure a “green” economic recovery. Sustainable portfolios continue to hold up well during the rebound from the COVID-related market drawdown. Looking ahead, we already see signs of the growing interest in the "social" aspect of ESG, and the green recovery commitments mean environment-related opportunities will remain in the spotlight. So we see plenty of opportunities in sustainability and recommend investors seek exposure to it, especially in areas such as healthtech, renewable energy, and impact private market strategies such as in oncology.

Sustainable investment opportunities during COVID-19

The setbacks for environmental sustainability during the COVID-19 crisis, such as an increase in single-use products for hygiene reasons, have generally proven to be temporary. As lockdowns ease life in many countries is returning to some version of normality, even including the use of ceramic coffee cups again.

Sustainable portfolios held up relatively well during the March 2020 drawdown and continue to benefit from defensive positioning and a supportive policy environment. The European Commission, along with a host of governments, has reaffirmed its commitment to a "green recovery," suggesting that sustainability remains a priority. We expect increased investor focus on ESG considerations as a consequence of the pandemic, an elevated importance of "social" for companies and investors, and investor focus to remain on environment-related opportunities.

There are ample ways to gain exposure to sustainable investment opportunities, including the following:

Replacing traditional with sustainable

Green bonds, on an index level, have exhibited the defensive behavior we expected compared to broad investment grade (IG) corporate bond indexes. We continue to expect green bonds to exhibit lower volatility and smaller drawdowns compared to non-green bonds during periods of market stress.

Multilateral development bank (MDB) bonds

The bonds have an important role to play in the recovery, and we have seen an uptick in issuance specifically targeting programs that mitigate the impacts of COVID-19. In a diversified, sustainable portfolio, MDB bonds replace conventional high grade bonds and as such are supposed to provide a modest contribution to portfolio returns during good times and to protect investors against sharp losses from risky assets during market corrections.

Investing in SDG equity themes.

Investors can direct their capital to companies that support the United Nations’ Sustainable Development Goals (SDGs), for example by looking into sustainable longer-term themes such as healthtech, education services, smart mobility, or impact private market strategies such as in oncology. Also worth consideration are themes that support biodiversity and the low carbon energy transition such as renewable energy, agricultural yield, water, and clean air and carbon reduction. Supported by evolving regulation and increased funding from sustainability-minded investors, the SDGs create new opportunities for companies and should help them to identify new markets and build new value chains.

Adjust your portfolio to your SI preferences.

A core portfolio allocation to the stocks and bonds of ESG leaders can provide defensive characteristics due to the tilt to larger, higher-quality companies. Issue-specific approaches are possible, too. For example, investors concerned about pollution and waste can seek companies with better environment management policies and systems that reduce packaging and recycle more.

Consider alternative SI-aligned approaches.

Given the volatility at present, defensive ways of gaining exposure to sustainability-aligned themes—for example, structured solutions that offer a yield-pickup, or put-writing strategies for investors who can implement options—are possible, too.

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Key investment takeaways:

  • We expect an increased focus on ESG considerations after COVID-19 from investors and governments, with a reduced tolerance for unsustainable practices.
  • As COVID-19 has focused the world's attention on public health, any social changes that emerge, such as investment in healthcare or elderly care, will ultimately be reflected in new investment opportunities.
  • We highlight healthcare, access to medicines, and social bonds as areas that we think will rise in importance to investors.
  • Investors can seek diversified exposure to sustainable investing opportunities, or channel their capital in a manner more exposed to a specific issue important to them. Many SI approaches have defensive characteristics, while SI themes provide growth and upside potential.

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