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The Outperformance of ESG Investing During the COVID-19 Selloff

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ESG Investing COVID-19 Selloff

ESG Investing COVID-19 Selloff

This Markets in a Minute Chart is available as a poster.

ESG Investing During the COVID-19 Selloff

Many investors know that ESG investing considers a company’s environmental, social, and governance practices. While this has the obvious benefit of aligning investments with personal values, it also has the potential to produce above-average returns.

In today’s Markets in a Minute chart from New York Life Investments, we highlight how ESG leaders outperformed both the broader market and ESG laggards during the COVID-19 selloff.

ESG Leader Returns

Amid heightened volatility in the first quarter, sustainable companies were able to provide a level of downside protection.

The following data shows returns by MSCI ESG ratings. These ratings rank a company based on how it performs relative to its peers on industry-specific risks. For example, an oil and gas company may be rated as an ESG leader if it manages issues like toxic emissions and waste better than its competitors.

From January through March 2020, here’s how ESG leaders performed relative to their respective index and ESG laggards:

 ESG LeadersIndexESG Laggards
MSCI ACWI
Global Equity
-15.6%-21.3%-22.1%
S&P 500
U.S. Equity
-10.8%-19.6%-22.2%

Within the MSCI All Country World Index (ACWI), ESG leaders saw losses that were nearly six percentage points smaller than the index. As of March 31, the index contained 472 ESG leaders and 378 ESG laggards. The remaining 1,500+ securities demonstrated average ratings.

The performance difference was even more evident in the S&P 500. ESG leaders had returns that were almost 9 percentage points better than the index, and more than 10 percentage points better than ESG laggards. The index included 84 ESG leaders and 47 ESG laggards. The remaining securities, of which there were about 370, had average ratings.

What could help explain the outperformance of sustainable stocks in this situation?

By their very definition, ESG leaders are better at mitigating serious environmental, social, and governance risks. This means they are more likely to avoid large financial losses and potential bankruptcies. As a result, they tend to provide enhance downside protection during market selloffs. On the other hand, ESG laggards may suffer from higher operational costs, potential litigation costs, and more volatility.

ESG Investing: A Popular Choice

During the COVID-19 selloff, investors dramatically reduced their risk exposures—and this included pouring money into ESG investing strategies. Worldwide ESG fund inflows topped $45 billion, a sharp contrast to the $385 billion in overall fund universe outflows.

ESG Investing Flows COVID-19 Selloff

However, this is far from a short-term trend. For the past three years, global assets in sustainable funds have been steadily increasing. The COVID-19 selloff has simply accelerated investor’s shifting preferences for companies that better manage sustainability risks.

Of course, with over 2,500 sustainable funds available globally, the performance of ESG investments can vary. Investors can analyze how a fund chooses companies in order to select a strategy that aligns with their personal views, and maximizes their chances of higher returns.

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Markets in a Minute

Visualizing the Three Different Types of Inflation

What are the different types of inflation? Which economic forces impact each type? Below, we chart each over modern history.

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Types of Inlfation

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Visualizing Three Types of Inflation

Inflation is dominating the news as prices hit 40-year highs.

While the price of everyday goods, including food and energy, is the most widely cited type of inflation, other forms exist across the broader economic system.

In this Markets in a Minute from New York Life Investments, we chart three types of inflation and the macroeconomic factors that influence each type.

1. Monetary Inflation

Monetary inflation occurs when the U.S. money supply increases over time. This represents both physical and digital money circulating in the economy including cash, checking accounts, and money market mutual funds.

The U.S. central bank typically influences the money supply by printing money, buying bonds, or changing bank reserve requirements. The central bank controls the money supply in order to boost the economy or tame inflation and keep prices stable.

Between 2020-2021, the money supply increased roughly 25%—a historic record—in response to the COVID-19 crisis. Since then, the Federal Reserve began tapering its bond purchases as the economy showed signs of strength.

YearMoney SupplyAnnual Percent Change
2022*$21.7T0.9%
2021$21.5T12.6%
2020$19.1T24.8%
2019$15.3T6.3%
2018$14.4T3.6%
2017$13.9T5.3%
2016$13.2T7.3%
2015$12.3T5.1%
2014$11.7T6.4%
2013$11.0T4.8%
2012$10.5T8.2%
2011$9.7T10.2%
2010$8.8T6.0%
2009$8.3T1.2%
2008$8.2T9.3%
2007$7.5T5.6%
2006$7.1T6.0%
2005$6.7T4.7%
2004$6.4T4.9%
2003$6.1T5.2%
2002$5.8T7.4%
2001$5.4T10.2%
2000$4.9T6.5%
1999$4.6T4.5%
1998$4.4T10.0%
1997$4.0T5.3%
1996$3.8T5.6%
1995$3.6T2.9%
1994$3.5T0.0%
1993$3.5T2.9%
1992$3.4T0.0%
1991$3.4T3.0%
1990$3.3T3.1%
1989$3.2T6.7%
1988$3.0T7.1%
1987$2.8T3.7%
1986$2.7T8.0%
1985$2.5T8.7%
1984$2.3T9.5%
1983$2.1T10.5%
1982$1.9T5.6%
1981$1.8T12.5%
1980$1.6T14.3%
1979$1.4T0.0%
1978$1.4T7.7%
1977$1.3T8.3%
1976$1.2T20.0%
1975$1.0T-99.9%
1974$902B5.4%
1973$856B6.7%
1972$802B13.0%
1971$710B13.2%
1970$627B6.6%

Indicated by the M2 Money Stock.
*Data as of April 2022.

It’s worth noting that, in theory, increasing the money supply faster than the growth in real output may cause consumer price inflation, especially if the velocity of money (speed at which money exchanges hands) is high. The reason is that there is more money chasing the same number of goods, and this eventually leads to increases in prices.

2. Consumer Price Inflation

Consumer price inflation occurs when the prices of goods and services increase. It is typically measured by the Consumer Price Index (CPI), which shows the average price increase of a basket of goods, such as food, clothing, and housing.

Supply chain issues, geopolitical events, monetary supply, and consumer demand may all affect consumer price inflation.

Rising 8.6% in May year-over-year, the CPI hit its highest level in four decades. Russia’s invasion of Ukraine and COVID-19 have caused extensive disruption in supply chains, from oil to wheat, leading to increased price pressures worldwide.

YearCPI Annual Percent Change
2022*8.6%
20214.7%
20201.2%
20191.8%
20182.4%
20172.1%
20161.3%
20150.1%
20141.6%
20131.5%
20122.1%
20113.2%
20101.6%
2009-0.4%
20083.8%
20072.9%
20063.2%
20053.4%
20042.7%
20032.3%
20021.6%
20012.8%
20003.4%
19992.2%
19981.6%
19972.3%
19962.9%
19952.8%
19942.6%
19933.0%
19923.0%
19914.2%
19905.4%
19894.8%
19884.1%
19873.7%
19861.9%
19853.5%
19844.3%
19833.2%
19826.1%
198110.3%
198013.5%
197911.3%
19787.6%
19776.5%
19765.7%
19759.1%
197411.1%
19736.2%
19723.3%
19714.3%
19705.8%
19695.5%
19684.3%
19672.8%
19663.0%
19651.6%
19641.3%
19631.2%
19621.2%
19611.1%
19601.5%
19591.0%
19582.7%
19573.3%
19561.5%
1955-0.3%
19540.3%
19530.8%
19522.3%
19517.9%
19501.1%
1949-1.0%
19487.7%
194714.4%
19468.5%
19452.3%
19441.6%
19436.0%
194210.9%
19415.1%
19400.7%
1939-1.3%
1938-2.0%
19373.7%
19361.0%
19352.6%
19343.5%
1933-5.2%
1932-10.3%
1931-8.9%
1930-2.7%

*Data for 2022 shows the year-over-year change from May 2021 to May 2022.

When consumer price inflation gets too heated, the central bank may increase interest rates to curtail spending and allow prices to cool down.

3. Asset-Price Inflation

Finally, asset-price inflation represents the price increase of stocks, bonds, real estate, and other financial assets over time. While there are a number of ways to show asset-price inflation, we will use household net worth as a percentage of GDP.

Often, a low interest rate climate creates a favorable environment for asset prices. This can be seen over the last decade as low borrowing costs were met with rising asset prices and strong investor confidence. In 2021, household net worth as a percentage of GDP stood at 620%.

YearU.S. Interest Rate Household Net Worth
as a % of GDP
20210.1%620%
20200.1%510%
20191.6%520%
20182.4%520%
20171.3%510%
20160.6%490%
20150.2%490%
20140.1%480%
20130.1%450%
20120.1%430%
20110.0%440%
20100.1%430%
20090.1%410%
20080.1%460%
20073.1%490%
20065.2%480%
20054.1%460%
20042.0%450%
20030.9%410%
20021.2%430%
20011.5%420%
20005.4%440%
19994.0%420%
19984.1%420%
19975.8%390%
19966.3%390%
19954.7%370%
19944.9%380%
19932.9%380%
19922.7%380%
19914.1%380%
19905.5%380%
19898.0%370%
19889.0%370%
19876.9%380%
198614.4%360%
198513.5%340%
19848.7%340%
19839.9%360%
198211.2%350%
198113.1%340%
198022.0%330%
197914.8%330%
197810.8%330%
19776.5%330%
19764.2%330%
19755.4%340%
19743.9%340%
19739.8%360%
19725.5%360%
19713.0%360%
19703.0%350%
19695.0%360%
19684.0%350%
19674.5%360%
19665.0%350%
19654.6%370%
19644.0%370%
19633.3%380%
19623.0%380%
19612.5%390%
19603.0%370%
19594.0%380%
19582.4%390%
19573.0%370%
19563.0%370%
19552.5%360%

Interest rates indicated by the Effective Federal Funds Rate

Sometimes rising asset prices can be a misleading sign of a strengthening economy since no real output is produced. Instead, this may indicate an asset bubble.

How the Types of Inflation Impact You

With monetary inflation, businesses and consumers have more money at their disposal, which could then boost demand and further increase inflation in the overall economy.

However, the degree that this impacts consumer price inflation can be unclear. Over the last decade, the money supply ballooned but consumer price inflation stayed relatively stable. Instead, supply shocks seen with COVID-19 and the invasion of Ukraine have had a more immediate effect. The effect of this scarcity in goods has made prices more sensitive to demand. This can be seen with gasoline prices at record highs.

When it comes to asset price inflation, a significant increase to the monetary supply and low interest rates are likely factors behind rising asset prices, among other variables. Yet as the Federal Reserve takes a more hawkish stance on monetary policy, the future of asset price inflation remains to be seen.

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Markets in a Minute

Mapped: Economic Predictions for 2022 and Beyond

Global GDP growth is forecast to drop from 6.1% in 2021 to 3.6% in 2022. This map shows economic predictions for 2022 and beyond by country.

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World map with countries coloured according to economic predictions for 2022

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Economic Predictions for 2022 and Beyond

How resilient will countries be in 2022? Economies have to contend with commodity shortages related to the Russia-Ukraine war, supply chain issues due to lockdowns in China, and tightening monetary policy as inflation rises.

In light of these challenges, the International Monetary Fund (IMF) has lowered its economic predictions for 2022 and beyond. The IMF predicts that global GDP growth will slow from 6.1% in 2021 to 3.6% in 2022 and 2023.

In this Markets in a Minute from New York Life Investments, we explore GDP projections by country. It’s the second in a two-part series that explores GDP growth around the world.

GDP Forecasts by Country

Due to the war in Ukraine, the IMF notes that the economic predictions for 2022 and beyond have considerable uncertainty. The projections also assume that the conflict remains confined to Ukraine and that the pandemic’s health and economic consequences lessen during 2022.

Here are the IMF’s predictions for real GDP growth by country. Unsurprisingly, Ukraine will have the most severe contraction of -35% this year. Russia’s invasion has damaged or destroyed 30% of the nation’s infrastructure, and more than 14 million people have fled their homes.

Jurisdiction2022P2023P
Afghanistann/an/a
Albania2.0%2.8%
Algeria2.4%2.4%
Andorra4.5%2.7%
Angola3.0%3.3%
Antigua and Barbuda6.5%5.4%
Argentina4.0%3.0%
Armenia1.5%4.0%
Aruba2.7%3.7%
Australia4.2%2.5%
Austria2.6%3.0%
Azerbaijan2.8%2.6%
Bahrain3.3%3.0%
Bangladesh6.4%6.7%
Barbados11.2%4.9%
Belarus-6.4%0.4%
Belgium2.1%1.4%
Belize5.7%3.4%
Benin5.9%6.2%
Bhutan4.4%4.5%
Bolivia3.8%3.7%
Bosnia and Herzegovina2.5%2.3%
Botswana4.3%4.2%
Brazil0.8%1.4%
Brunei Darussalam5.8%2.6%
Bulgaria3.2%4.5%
Burkina Faso4.7%5.0%
Burundi3.6%4.6%
Cabo Verde5.2%5.8%
Cambodia5.1%5.9%
Cameroon4.3%4.9%
Canada3.9%2.8%
Central African Republic3.5%3.7%
Chad3.3%3.5%
Chile1.5%0.5%
China4.4%5.1%
Colombia5.8%3.6%
Comoros3.5%3.7%
Costa Rica3.3%3.1%
Croatia2.7%4.0%
Côte d'Ivoire6.0%6.7%
Cyprus2.1%3.5%
Czech Republic2.3%4.2%
Democratic Republic of the Congo6.4%6.9%
Denmark2.3%1.7%
Djibouti3.0%5.0%
Dominica6.8%5.0%
Dominican Republic5.5%5.0%
Ecuador2.9%2.7%
Egypt5.9%5.0%
El Salvador3.0%2.3%
Equatorial Guinea6.1%-2.9%
Eritrea4.7%3.6%
Estonia0.2%2.2%
Eswatini2.1%1.8%
Ethiopia3.8%5.7%
Fiji6.8%7.7%
Finland1.6%1.7%
France2.9%1.4%
Gabon2.7%3.4%
Georgia3.2%5.8%
Germany2.1%2.7%
Ghana5.2%5.1%
Greece3.5%2.6%
Grenada3.6%3.6%
Guatemala4.0%3.6%
Guinea4.8%5.8%
Guinea-Bissau3.8%4.5%
Guyana47.2%34.5%
Haiti0.3%1.4%
Honduras3.8%3.5%
Hong Kong SAR0.5%4.9%
Hungary3.7%3.6%
Iceland3.3%2.3%
India8.2%6.9%
Indonesia5.4%6.0%
Iraq9.5%5.7%
Ireland5.2%5.0%
Islamic Republic of Iran3.0%2.0%
Israel5.0%3.5%
Italy2.3%1.7%
Jamaica2.5%3.3%
Japan2.4%2.3%
Jordan2.4%3.1%
Kazakhstan2.3%4.4%
Kenya5.7%5.3%
Kiribati1.1%2.8%
Korea2.5%2.9%
Kosovo2.8%3.9%
Kuwait8.2%2.6%
Kyrgyz Republic0.9%5.0%
Lao P.D.R.3.2%3.5%
Latvia1.0%2.4%
Lebanonn/an/a
Lesotho3.1%1.6%
Liberia4.5%5.5%
Libya3.5%4.4%
Lithuania1.8%2.6%
Luxembourg1.8%2.1%
Macao SAR15.5%23.3%
Madagascar5.1%5.2%
Malawi2.7%4.3%
Malaysia5.6%5.5%
Maldives6.1%8.9%
Mali2.0%5.3%
Malta4.8%4.5%
Marshall Islands2.0%3.2%
Mauritania5.0%4.4%
Mauritius6.1%5.6%
Mexico2.0%2.5%
Micronesia-0.5%2.8%
Moldova0.3%2.0%
Mongolia2.0%7.0%
Montenegro3.8%4.2%
Morocco1.1%4.6%
Mozambique3.8%5.0%
Myanmar1.6%3.0%
Namibia2.8%3.7%
Nauru0.9%2.0%
Nepal4.1%6.1%
Netherlands3.0%2.0%
New Zealand2.7%2.6%
Nicaragua3.8%2.2%
Niger6.9%7.2%
Nigeria3.4%3.1%
North Macedonia3.2%2.7%
Norway4.0%2.6%
Oman5.6%2.7%
Pakistan4.0%4.2%
Palau8.1%18.8%
Panama7.5%5.0%
Papua New Guinea4.8%4.3%
Paraguay0.3%4.5%
Peru3.0%3.0%
Philippines6.5%6.3%
Poland3.7%2.9%
Portugal4.0%2.1%
Puerto Rico4.8%0.4%
Qatar3.4%2.5%
Republic of Congo2.4%2.7%
Romania2.2%3.4%
Russia-8.5%-2.3%
Rwanda6.4%7.4%
São Tomé and Prìncipe1.6%2.8%
Samoa0.0%4.0%
San Marino1.3%1.1%
Saudi Arabia7.6%3.6%
Senegal5.0%9.2%
Serbia3.5%4.0%
Seychelles4.6%5.6%
Sierra Leone3.4%4.3%
Singapore4.0%2.9%
Slovak Republic2.6%5.0%
Slovenia3.7%3.0%
Solomon Islands-4.0%3.2%
Somalia3.0%3.6%
South Africa1.9%1.4%
South Sudan6.5%5.6%
Spain4.8%3.3%
Sri Lanka2.6%2.7%
St. Kitts and Nevis10.0%4.7%
St. Lucia9.7%6.0%
St. Vincent and the Grenadines5.0%6.4%
Sudan0.3%3.9%
Suriname1.8%2.1%
Sweden2.9%2.7%
Switzerland2.2%1.4%
Syrian/an/a
Taiwan Province of China3.2%2.9%
Tajikistan2.5%3.5%
Tanzania4.8%5.2%
Thailand3.3%4.3%
The Bahamas6.0%4.1%
The Gambia5.6%6.2%
Timor-Leste2.0%3.6%
Togo5.6%6.2%
Tonga-1.7%3.0%
Trinidad and Tobago5.5%3.0%
Tunisia2.2%n/a
Turkey2.7%3.0%
Turkmenistan1.6%2.5%
Tuvalu3.0%3.5%
Uganda4.9%6.5%
Ukraine-35.0%n/a
United Arab Emirates4.2%3.8%
United Kingdom3.7%1.2%
United States3.7%2.3%
Uruguay3.9%3.0%
Uzbekistan3.4%5.0%
Vanuatu2.2%3.4%
Venezuela1.5%1.5%
Vietnam6.0%7.2%
West Bank and Gaza4.0%3.5%
Yemen1.0%2.5%
Zambia3.1%3.6%
Zimbabwe3.5%3.0%

Guyana, a country of less than 800,000 people in South America, is forecast to have the highest GDP growth of 47.2% in 2022 and 34.5% in 2023. The country has begun to rapidly develop its offshore oil industry, with oil earnings estimated to make up nearly 40% of its GDP.

In Asia, India is projected to see strong growth of 8.2% in 2022 and 6.9% in 2023. The growth is supported by government spending and economic reforms, such as lowering the corporate tax rate and allowing more foreign direct investment. In fact, foreign direct investment reached a record $84 billion in 2021-22.

Meanwhile, the IMF predicts that GDP growth in the U.S. will hit 3.7% in 2022 and 2.3% in 2023. The Russia-Ukraine war is expected to slow growth in America’s trading partners, reducing their demand for American goods. The central bank has also withdrawn U.S. monetary support faster than expected as rates rise to combat inflation. Even still, the IMF expects that the U.S. will reach its pre-pandemic trend output path by 2022.

Supporting Growth

Certainly, there are a number of risks facing the global economy. Countries with strong fiscal and monetary support, as well as countries with in-demand exports, have some of the best economic predictions for 2022 and beyond.

The IMF also offers countries various recommendations in order to support growth. For instance, central banks can offer clear interest rate guidance to minimize surprises that disrupt the markets. Governments can continue offering targeted fiscal support to vulnerable populations, such as refugees and households most impacted by the pandemic.

Over the longer-term, countries can focus on reskilling their workforce for the digital transformation, investing in renewables for the green transition, and improving the resiliency of global supply chains.

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