There is a debate raging in the investment world offering competing views about why ESG investments appeared to outperform when markets nosedived in the aftermath of the Covid-19 shock earlier this year. BlackRock and Morningstar were among the big names to suggest ESG funds were demonstrating more resilience than their non-ESG counterparts.

But the debate unfolding is perhaps more compelling for reasons beyond the arguments themselves. It is fascinating because of the paradigm shift it represents.

Rewind 15 years, a counter narrative soon emerged in response to the then UN Secretary-General Kofi Annan’s letter to the CEOs of the world’s biggest financial institutions. He was inviting them to take part in an initiative to integrate what would come to be known as ESG considerations into what they do.

This narrative stated that any attempt to integrate responsibility into capital markets would come with an inevitable performance penalty. This penalty would be unacceptable – reckless even – to all but a maverick minority. As a result, ESG would, at best, linger on the peripheries of mainstream investment as a well-intended, yet inherently flawed, outlier.

From a performance standpoint, sustainable funds held up better than conventional funds in the first quarter, which is likely to help the group attract more flows going forward.

The story didn’t hold true. ESG is firmly embedded in the capital markets. According to the Global Sustainable Investment Alliance (GSIA),by 2018 ESG considerations were at the forefront of investment decisions influencing the flow of £22.8 trillion.

In the same year the GSIA reported sustainable investing accounted for more than 50 percent of total professionally managed assets in Canada, Australia and New Zealand, nearly half in Europe, 26 percent in the United States and 18 percent in Japan.

This is because the balance has tipped towards investors, boards and executives who know issues such as climate change, income inequality and now Covid-19 must be treated as the serious externalities they are. They also know their customers share these fears. ESG is providing an invaluable set of tools to help investors, businesses and increasingly grateful governments navigate and adapt to this new reality.

But before we think about how to hone our ESG frameworks further, lets first take a moment to pause. The debate is no longer about performance penalties, meddling in the natural order of things. The fact there is debate about possible outperformance by this former disruptive outlier, shows just how far and quickly the debate has moved on.

Some links and references for anyone wanting to delve deeper:

• Morningstar director of ESG research Jon Hale on performance of ESG funds since downturn
• The Summer of 2020 was awash with stories in the media like this [FT, paywall], suggesting record sums were injected into sustainable investments during the pandemic
• A paper on SSRN critical of claims ESG scores can be used as indicators of share price resilience during the COVID-19 pandemic.