Crises Place Sharper Focus on Sustainability

Challenged by Three Crises

We wouldn’t be the first to note that we find ourselves in the midst of two crises — COVID-19 and racial injustice. We wouldn’t even be the first to say that we’re in the midst of three of them, including climate change in this crisis pantheon. What all of these mean for investors is both profound and — like the coronavirus itself — novel. How we react to it should be just as novel.

What we’re experiencing now is not something that can be managed through like any garden-variety market volatility. We are challenged by all three crises — COVID-19, racism and climate change — to think longer-term, and to think about systemic challenges to financial markets and to society at large. One task is to build more resilience into our investment portfolios. Central to that task, we believe, is our focus on the longer-term risks and opportunities arising from the transition to a more sustainable – and more just – future.

Of course, while we consider the longer-term implications of these crises, and improving the resiliency of our investment portfolios, we are also busy with the immediate task of positioning and managing those portfolios around today’s fast-moving events.

Equities Rebound Amid Continued Uncertainty

During the second quarter, equity markets quickly bounced back from unprecedented first quarter declines. This was largely the result of massive fiscal and monetary stimuli designed to stave off a severe recession as well as optimism about the reopening of the economy. The S&P 500 Index returned 20.5%, its strongest quarter since the fourth quarter of 1998. Small cap companies were even stronger, as the Russell 2000 Index returned 25.4%. Non-U.S. equities, as represented by the MSCI EAFE Index, delivered a solid 14.9% return but once again lagged U.S. equities.

Fixed income trailed equity performance considerably, though the Bloomberg Barclays US Aggregate Index delivered a solid 2.9% return. Bond returns benefitted from the contraction in corporate spreads as the Federal Reserve’s intervention calmed credit market concerns.

These soaring equity returns need to be considered in context. They come on the heels of the fastest market retreat in history, with the S&P 500 Index selling off -34% from a market peak in February to bear market levels in March. The equity market rebound from its lows in March has resulted in stretched valuations that are pricing in a V-shaped recovery for the economy.

The problem is that the shape of the recovery and the general optimism about the reopening of the U.S. economy are still in question. The reopening has led to a resurgence in new virus cases resulting in pauses and rollbacks on eased social restrictions. Since the virus has not peaked in the U.S., it remains to be seen how much weight the markets will place on the additional human impact and economic disruptions.

In addition to the stimulus and reopening of the U.S. economy, equity markets have been buoyed by better than expected economic statistics. These too need to be considered in a broader context. While the unemployment data have surprised to the upside the last two months, the fact remains that the unemployment rate of 11.1% is far above the February pre-crisis level of 3.5%.

Looking forward, the economy should continue to benefit from the impact of the unprecedented stimulus efforts, however, markets will be primarily monitoring the course of the virus and progress on a vaccine and therapeutic treatments, all of which remain uncertain as we write.

Given this uncertainty, we anticipate continued volatility. In such an environment, investors need to be vigilant about assuring their portfolios reflect their tolerance for risk and investment managers need to be vigilant about constructing portfolios that are designed to be resilient.

In fact, if there was ever a time when resilience has become an investment imperative, this is it.

Evidence of Resilience in Sustainable Investing

We’ve learned a lot of lessons from the COVID-19 pandemic in the investment world — as well as in the real world. The pandemic has brought some key sustainability issues into sharper focus, particularly on the “S” pillar of ESG. We all see the headlines; we know there were more than 44 million unemployment claims made between mid-March and June 6, something that The New York Times described as “literally off the charts,” and more than four times greater than the previous record set in 1982.

One noteworthy thing, for investors, is that the majority of sustainable funds have outperformed during the downturn and crisis. S&P Global reported in April that ESG funds were outperforming the S&P 500 Index during the pandemic crisis, and The Wall Street Journal in May affirmed that ESG funds also outperformed non-ESG peers. An analysis of more than 6,000 firms across 56 countries noted that the dramatic stock price drop that affected almost all listed equities was milder among firms with, among other things, more corporate social responsibility activities. Firms that have stronger relationships with workers, suppliers, customers and communities create the trust that is needed to make the adjustments during market shocks. Goldman Sachs reported in April 2020 that companies with better sustainability performance had also weathered the COVID-19 crisis better up to that point.1

That’s no accident. Sustainable companies and ESG funds also tended to outperform during the last downturn, the Great Recession of 2008 – 2009. Great Place to Work noted in a recent report that companies in the S&P 500 with high ratings for diversity and inclusion outperformed the index throughout and following the 2008 recession and continued to outperform long after the recession ended. Just Capital’s report on JUST jobs noted that companies with better workplace policies (gender pay equity analysis, diversity and equal opportunity policies and targets, paid time off policies, paid parental leave policies, day care services, flexible working hours, career development policies and tuition reimbursement) enjoyed higher return on equity (ROE)2 over the five years preceding the study in all cases but one (paid time off policy).

The struggle for racial justice is a moral imperative, as well as an essential component for a just, sustainable and more prosperous society. McKinsey estimates that closing the racial wealth gap in the United States alone could boost gross domestic product (GDP) by 4-6% by 2028, and by trillions globally. The Wall Street Journal reported in 2019 that the 20 most diverse companies in the S&P 500 Index — based on gender, age and ethnic diversity — had better operating results than the lowest-scoring firms and superior share price performance.

“What these crises have taught us — as previous crises have — is that attending to long-term sustainability and resiliency aren’t two tasks, they are one.”

Attending to Long-term Sustainability and Resiliency

In short, what makes a company more sustainable makes it more resilient. All of these issues — worker safety, human resource management, racial equality, customer safety and community fairness — have been a focus of sustainable investing for a long time. The pandemic and the uprising against racism have only served to bring them into sharper focus.

There is always, in investment as in life, some kind of wolf at the door: a war, a drought, a flood, a credit crunch, mass migration — an endless parade of wolves. But things that make companies more resilient in crises like these are more like termites in the basement: problems that should be attended to but are often neglected as we battle the wolves. What these crises have taught us — as previous crises have — is that attending to long-term sustainability and resiliency aren’t two tasks, they are one.


1 Evan Tylenda, Sharmini Chetwode, Derek R. Binghan, Nihar Kantipudi Brendan Cobett, Keebum Kim and Dan Duggan, “GS SUSTAIN: ESG – Neither gone nor forgotten,” Goldman Sachs Equity Research, 2 April 2020.

2Return on Equity (REO): The amount of net income returned as a percentage of shareholders’ equity. Return on equity measures a corporations’ profitability by revealing how much profit a company generates with the money shareholders have invested.


Index Definitions

The S&P 500 Stock Index is an unmanaged index of large capitalization common stocks.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

The MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. Performance for the MSCI EAFE Index is shown “net”, which includes dividend reinvestments after deduction of foreign withholding tax.

The Bloomberg Barclays US Aggregate Bond Index is a broad base index, maintained by Bloomberg L.P. often used to represent investment grade bonds being traded in United States.

One cannot invest directly in an index.


The statements and opinions expressed in this commentary are of the authors and as of the date of publication. All performance data quoted represent past performance, which does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. See Pax World Funds’ performance for most recent month-end performance information. Holdings for the funds are subject to change. Please see the Pax World Funds’ holdings for current holdings information.

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Steve Falci, CFA®

Chief Investment Officer, Executive Vice President

Steve Falci is Executive Vice President and Chief Investment Officer at Impax Asset Management LLC, the North American division of Impax Asset Management Group and investment adviser to Pax World Funds.

Steve oversees the firm’s U.S.‑managed strategies, including U.S. equity, smart beta and fixed income strategies as well as the integration of ESG research into investment analysis.

Steve has more than 30 years of experience in investment management. Prior to joining the firm in 2014, he served as Head of Strategy Development, Sustainable Investments, at Kleinwort Benson Investors, where he provided strategic direction, product development and identification of new market opportunities in the sustainable investment business. Before that, Steve served as Chief Investment Officer of Equities at Calvert Group and was a Principal and Senior Portfolio Manager at Mellon Equity Associates.

Steve serves on the board of directors for the US Forum for Sustainable and Responsible Investment (US SIF). He also serves on the Investment Committee for Mercy Investment Services. Steve has a Master of Business Administration from the Stern School of Business at New York University, a Master of Arts from Pittsburgh Theological Seminary and a Bachelor of Science in economics. He is a CFA® charterholder.

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Julie Gorte, Ph.D.

Senior Vice President for Sustainable Investing

Julie Gorte is Senior Vice President for Sustainable Investing at Impax Asset Management LLC, the North American division of Impax Asset Management Group and investment adviser to Pax World Funds.

She oversees environmental, social and governance-related research on prospective and current investments as well as the firm’s shareholder engagement and public policy advocacy. Julie is also a member of the Impax Gender Analytics team.

Prior to joining the firm, Julie served as Vice President and Chief Social Investment Strategist at Calvert. Her experience before she joined the investment world in 1999 includes a various number of roles. Julie spent nearly 14 years as Senior Associate and Project Director at the Congressional Office of Technology Assessment. Additionally, she has held the roles of Vice President for Economic and Environmental Research at The Wilderness Society, and Program Manager for Technology Programs in the Environmental Protection Agency’s policy office and Senior Associate at the Northeast-Midwest Institute.

Julie serves on the boards of the Endangered Species Coalition, E4theFuture, Clean Production Action and is the board chair of the Sustainable Investments Institute.

Julie received a Ph.D. and Master of Science in resource economics from Michigan State University and a Bachelor of Science in forest management at Northern Arizona University.

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