Investing towards a resilient world
They say that in every crisis there is great opportunity. Even this harrowing COVID-19 period will have its silver linings. From a financial markets perspective, as asset prices move dramatically because of uncertainty but also changing consumer demand, new investment opportunities with large upside potential emerge. Like every major financial crisis this one is acting like a storm, intensively stressing our systems and exposing vulnerabilities, while reminding us why downside protection matters. And like after every major storm, we should learn from this historic event to make ourselves more resilient – individually and systemically.
It will take some time before the COVID-19 storm gives way, but we can already start seeing some lessons. For starters, when it comes to pandemic response, some of the countries most impacted by infectious viruses like SARS and MERS turned out to be more effective at containing COVID-19 than others. They understood the advantages of taking quick and decisive action and leveraged this. On the financial markets front, the same holds true. Decisive actions can mitigate the impact of the economic shock as it reverberates across global markets in the months or even years to come.
For us at Swiss Re, one thing is already very clear – sustainability drives resilience. During Q1, our investment portfolio weathered the storm better than it would have if we had not been decisive about taking environmental, social, and governance (ESG) criteria into account early on. Our credit and equity benchmarks outperformed their traditional equivalents, even more so during the big market sell-off in March. We also saw several broader market indicators of why a sustainable portfolio is a more resilient portfolio. For example, through the first quarter of this year, 59% of ESG ETFs in the US beat the S&P 500, while 60% of ESG ETFs in Europe outdid the MSCI Europe Index. Sustainable ETFs also saw consistent inflows throughout the month of highest volatility, while traditional ETFs experienced heavy outflows.
Lower downside risk and better risk-adjusted returns over the long run are why Swiss Re switched to ESG benchmarks three years ago. Now knowing that this can hold true in periods of extreme volatility only strengthens our conviction that it was the right decision. With what we are learning from today's environment, our commitment to sustainability is only strengthened. Our ambition to achieve a net-zero emissions investment portfolio by 2050 will remain core to our investment approach even through difficult times.
After every major storm there is a period of rebuilding and the opportunity to do things differently, especially to be better prepared for the next time. Our lessons from this crisis so far make clear that there is a lot to be gained for all investors from shifting capital towards sustainable investments and rebuilding in an inclusive and climate-friendly way. In doing so we get the benefit of protecting our own portfolios, while contributing to a more resilient world – helping both ourselves and the systems around us.