• Market gyrations testing investors’ commitment to ESG investing
  • A stock-market rout may be the first critical test for sustainability investors and funds, many of whom have never faced a prolonged down market.
  • Coronavirus may reduce carbon footprints around the world, but low oil prices make fossil fuels more tempting.

The 15% meltdown in equities over the past three weeks is poised to test investors’ commitments to sustainability as never before.

Investors may have to rethink whether they want to hold companies that might put environmental, social and governance factors on the backburner to stay profitable or meet basic fiduciary commitments in the current coronavirus crisis. And collapsing oil prices are making it harder by discounting traditional fossil fuels against green alternatives.

So far, the outlook for ESG indexes and funds hasn’t been any worse than the broader market. The S&P 500 ESG Index and the Bloomberg SASB U.S. Large Cap ESG Index both tracked Monday’s 7.6% decline in the Standard & Poor’s 500 Index as well as its 4.9% rebound Tuesday.

“Sustainable funds continue to hold up well relative to conventional peers during the coronavirus correction,” Jon Hale, Morningstar’s head of sustainability research, said Monday on Twitter. Hale did a deeper dive on comparisons through March 6 and found that sustainable equity funds outperformed their peer groups, as did passive ESG funds when compared with convention index funds covering U.S. stocks and emerging markets.

Keeping pace with the S&P is a positive sign — that investing in sustainability doesn’t automatically mean leaving money on the table.

ESG ETFs “can use the current weakness in equities to prove to investors they won’t overshoot broader benchmarks on the downside when markets tank,” according to ETF Trends.

From a strict sustainability standpoint, the reasons behind the market collapse — from both the global spread of the novel coronavirus and an oil price war — include both pluses and minuses for mitigating climate risk.

Carbon footprints are expected to drop, at least for the short term, as more and more people around the world are quarantined. Employers are grounding staff and developing new systems to enable people to work from home. Plus, energy use is traditionally linked to economic growth, so a hit to GDP will likely make consumers use less fossil fuels.

But cheap traditional energy sources can hurt the market for greener alternatives, particularly if they’re priced at a level that’s less expensive in comparison. Traders sent shares of Tesla slumping 14% on Monday, the first day of trading after Saudi Arabia decided to glut the international oil markets, triggering a price collapse of as much as 30%. Tesla, which makes electric cars and solar panels, almost doubled the Standard & Poor’s 500 Index’s decline for the day but outpaced its rebound on Tuesday.

“This could become a true test of ESG, in the sense that heightened uncertainty and heightened complexity tend to really focus the mind and investors will need to carefully weigh the value of each investment,” Harald Walkate, head of corporate social responsibility and ESG at Natixis Investment Managers in Paris, told Bloomberg.

The MIT Technology Review outlined other sustainability risk factors, including obtaining financing for green-energy alternatives if the capital markets dry up and disruptions to the supply chain from China for things like solar panels, wind turbines and lithium-ion batteries that power electric vehicles and grid-storage devices.

And while they may have tracked the S&P’s decline Monday, the FlexShares STOXX US ESG Impact Index Fund and the FlexShares STOXX Global ESG Impact Index Fund, lagged the rebound on Tuesday, only regaining 2.9% and 2.4%, respectively.

“Rising health and financial fears could also divert public attention from the problem,” the MIT Technology Review said. During “an economic downturn and public health crisis, people would understandably become more focused on immediate health concerns and pocketbook issues, i.e. their jobs, retirement savings and homes. The longer-term dangers of climate change would take a back seat.”