Amanda Sillars, fund manager and ESG director, Jupiter
As fund buyers on behalf of investors within the £7bn Jupiter Merlin range of multi-asset portfolios, we believe the likely performance of ESG in a recession will depend largely on the wider interpretation of what ‘ESG’ really means.
Funds that exclude entire sectors on ESG grounds – most usually oil, gas, miners, defence and so on – run the risk of delivering weak absolute performance should these sectors outperform. This was the case in 2022, when energy was the only global equity sector to deliver positive returns, rising by nearly 50%.
This subset of ESG strategies inevitably tend to have a structural bias towards expensive growth and technology stocks as they often attract a high ESG score. This was a winning strategy for the decade prior to 2022, when equity markets were led by these characteristics. However, with the dramatic rise in inflation globally last year, the share price of these companies fell – precipitously, in some cases.
By contrast, fund managers who retain a broad investment universe and select companies that generate strong cashflows, minimal debt and are valued cheaply, while keeping company engagement at the heart of their investment strategy, are likely to fare better during a recession. As a result, company management will be encouraged and empowered to accelerate their ESG journey.
This is particularly true if interest rates are elevated making the cost of servicing debt high, as is the case currently. The similarity we draw is with homeowners, who need higher reserves and cashflow to pay higher mortgage costs.
This is one of the many reasons why we, as fund buyers, favour active fund managers who execute their onerous ESG responsibilities via engagement as opposed to exclusion.