It's coming home. If you live in England, that's a phrase that you've heard a lot of times over the last few days and well, in this video, I'd love to answer the question. Is it coming home? Is ESG coming home? Well, let's think of it as a game of two halves, first 2020, the pandemic first heading. And what we did see is that ESG definitely helped ESG funds saw their performances much muted compared to the crashes that we saw in other sectors of the market. So companies with strong ESG profiles funds, which collected those companies all tended to outperform the market. And that was then reflected in the earnings announcements that we saw coming out where companies started more and more to focus on their ESG criteria on the social and governance in particular, which had been left behind a bit, uh, behind climate the E the environment side. So ESG not only helped companies and ESG funds outperform, it became much more of a focal point of company's strategies as well. And this was nowhere more true than in energy companies, where we saw the stop of what seems to be a radical transformation in the business models, particularly being led by the European energy names. And that was all matched by flows. So famously ESG funds were one of the few sectors of the markets that actually saw positive inflows in equities. In the first quarter of 2020, when the market was really falling from the Corona virus pandemic. And those flows were sustained throughout the rest of the year. So in every single way in performance in flows and in the way that they were transforming their business models, ESG was helping companies throughout 2020.
Let's move on to the second half to 2021 what's been happening in the year so far. Well, we have seen a big shift from, um, net zero being something that was kind of talked about by governments and at the, at the global level to being something that companies and now investors are really trying to grapple with. And that I think is going to be a key theme that drives ESG through the rest of 2021. So we're seeing a move from not just the shareholder, but the whole stakeholder chain becoming involved in that discussion. And as we've said before, the risk of, of deviating from a market cap benchmark is now not seen as important or not as important. It's really all about proving your ESG credentials and less so about what you're tracking are might be to a standard global benchmark. And we've talked a lot about equity so far, but fixed income is going to have to, and it's increasingly stepping up, I've talked about Chinese green bonds before China does hold the key and green bonds are a great way of introducing financing that doesn't come from the state. The states are increasingly trying to pull away given the massive amounts of fiscal and monetary stimulus. They've already introduced one discussion that is definitely not going away. And it's definitely not been resolved is between divestment and engagement. Now that's a topic that active managers and big index managers tend to disagree on for obvious reasons, but it's something that we think has a spectrum of approaches and isn't a binary choice. And finally, I said that in 2020 climate had taken, uh, not a backseat, but had seen, um, social and governance features come to the full, but we really do think that 2021 is going to be the year of climate, particularly with cop 26 in Glasgow coming towards the end.
So why has climate kind of come back to the fore again in 2021? Well, frankly, we're at a tipping point. We've come to the point where I think it's hard to disagree. That climate change is occurring and that it's going to be radically transformative for the globe throughout the next few decades. And we need to take action now to make it stop or to at least to make it less severe than it has been before. So, um, climate regulation as a result is growing rapidly and investors, whether they like it or not, then going to have to conform to that regulation if they want to remain in the public capital markets. And, you know, I've talked about the energy companies before. Thankfully they have actually been leading the way in terms of responding to climate change and climate regulation. And given that their business models are the ones that are most under threat, we can see that they are going to have to transform the quickest to avoid rendering themselves obsolete. And all of this means that we're having massive capital reallocations, not just from governments, but also from corporates. And so from investors between different sectors of the economy, from the old economy to the new economy, from the brown economy, from the, to the green economy into technologies that are completely untested to those that are tried and tested. And all of that is being driven by the recognition that climate change is real and it's having a massive effect on the world right now.
Beyond 2021, where should you be looking as an investor? Well, the first thing is ensure that the indices you're in match your ESG beliefs so that you're in the right indices. Again, we feel that tracking error for a confirmed ESG investors has less relevance now than it had in the past. And we're seeing investors move, moving away from thinking solely of their portfolios in terms of relative risk, but thinking also of the risk of not sticking to their ESG values. As I said, with climate regulation and investment, really stepping up, you need to make sure that your portfolio is not only protecting against the risks of climate change, but is actually poised to benefit from decarbonisation. Cause there's a lot of opportunities out there, not just risks. And we tend to focus on the risks, but there are opportunities in the new technologies and the new sectors of the economy that are going to grow very quickly because of this need to address climate change. And finally inactive strategies ensure that they have ESG as an integrated input. So far, uh, exceptions and exclusions have been one way of dealing with ESG and active portfolios, divestment in other words, but we believe an integrated approach can actually deliver much better risk adjusted return, inactive strategies.
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