Interest in responsible or ESG investing began gaining momentum well before the world turned upside down in the first half of 2020.
Greta Thunberg’s rallying cries for governments to take action on climate change, Extinction Rebellion protests and David Attenborough’s Planet Earth program on ocean plastic pollution tugged on our consciences. While individuals began thinking about how they can reduce their carbon footprint in their homes, workplace and modes of transport, they also turned their attention to their investment portfolios.
Sustainable funds in the United States attracted new assets at a record pace in 2019, with estimated net flows into open-end and exchange-traded sustainable funds amounting to $20.6 billion for the year. In Europe, investors poured a record-shattering $141 billion into sustainable investments during the same year, with more than a third of these inflows coming in the final three months.
What happened next was truly unprecedented. As Covid-19 begun its spread from China to Europe and the rest of the world, governments locked down entire countries, health systems were overwhelmed and many people sadly lost their lives. Unemployment has soared and economies have crumbled.
In stock markets, record falls occurred as some plummeted as much as 30% over very short periods in late March, with oil companies, airlines and leisure companies bearing the brunt. Investors pulled billions from stock markets in an attempt to preserve their savings pots.
ESG Investing: A Coronavirus Silver Lining?
However, it soon became apparent that shares and funds with exposure to higher environmental, social and governance (ESG) credentials faced less impact.
Not only did they outperform the wider market, they also continued to attract inflows at a time when savers were incredibly nervous of losing their cash piles.
Sustainable funds across Europe saw inflows of $35 billion in the first quarter of 2020, amid a period when $174 billion was pulled from the overall European fund universe. Throughout the second quarter, flows into global sustainable funds climbed 72% to $71.1 billion, while assets under management topped $1 for trillion the first time.
“The continued inflows speak of the growing investor interest in ESG issues, especially in the wake of the Covid-19 crisis,” Morningstar’s Global Sustainable Fund Flows report said. “The disruption caused by the pandemic has highlighted the importance of building sustainable and resilient business models based on multi-stakeholder considerations.”
It has been argued that funds with higher ESG credentials have continued to enjoy outperformance and flows due to their lack of exposure to the most vulnerable sectors in the current environment — oil companies and airlines are of course among the biggest polluters.
ESG funds also tend to have higher exposure to technology and healthcare, areas that have been in high demand as many office workers switch to remote working, while researchers hunt for a Covid-19 vaccine.
However, commentators for ESG Clarity say this outperformance and asset gathering can only continue as investors realize the companies that have pushed ESG to the top of the agenda have more robust and sustainable business models, and therefore have more potential to withstand further volatility in stock markets. They will continue to garner support from staff, clients and shareholders.
Fund manager at U.K.-listed Rathbones David Harrison commented that “Companies that can demonstrate a strong ESG culture on a daily basis will be able to fortify their own economic moat.”
The Social Good
Amid the chaos, concern and uncertainty this year, it has been heartwarming to see so many companies go out of their way to “do the right thing.” Investors can appreciate companies looking after their workforce, supply chains and customers. Why? In this worrying climate, their actions will also have lasting reputational benefits.
John Streur, president and CEO of Calvert, explained: “How companies act now will impact their future brand value and profitability. There will be a lot based on how they conduct themselves through this period.”
Saker Nusseibeh, CEO of the international business of Federated Hermes, added investors are more conscious of companies’ social efforts than ever before. “When faced with a pandemic, and the possibility of the death of a loved one, we have realised there are things we value more than money. Society is telling you that we value human life and good outcomes.”
Therefore, while the E part of ESG was at the forefront of our minds leading up to 2020, the global pandemic has shone the light on the S element. We have seen how companies with strong social practices have better reputations while also outperforming.
As Simon Rawson, director of corporate engagement at ShareAction, the charity promoting responsible investment, has remarked that “Covid-19 has shone a spotlight on the social (‘S’) component of ESG in a way that we have never seen before.”
Jon Mowll, responsible investment analyst for EdenTree Investment Management said the role investors and businesses play as we move through the crisis is abundantly clear: “Short-term profitability must be disregarded, and the safety and wellbeing of everyone in a company’s sphere of influence, including in supply chains, prioritised. If and once that happens at scale, it may be difficult for us, looking back, to understand how anything else was considered acceptable.”
Looking to the future, experts interviewed by ESG Clarity have also predicted companies with sustainable practices will be at the forefront of the coronavirus recovery.
Many have suggested the crisis has highlighted the importance of tackling climate change. In fact, it “dwarfs the economic impact of Covid-19”, according to Mike Appleby, sustainable investment manager at U.K. fund house Liontrust.
He pointed out: “When we are able to look past Covid-19 the tools and techniques companies have developed to outperform in the face of a climate emergency, an obesity epidemic of failing boards, will be the making of sustainable investment.”
Encouragingly, governments are also pushing for greener initiatives to “build back better.” A quarter of the European Union’s 750 billion euro recovery fund has been earmarked for climate action. Importantly, a “do no harm” clause rules out environmentally damaging investments. Other countries around the world could follow suit.
The Bottom Line on Covid-19 and ESG Investing
Covid-19 has shown us the benefits of ESG investing, not just for our environment and societies, but also for the investee companies and shareholders themselves. It is now up to us to continue this momentum even after the pandemic comes to an end.
Fortunately, every sign suggests we will.
On the date of publication, Natalie Kenway did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Natalie Kenway joined ESG Clarity as editor in February 2020 to oversee the website and spearhead the brand in what is one of the biggest industry megatrends of the decade. Since then, Natalie has launched several new initiatives to the ESG Clarity brand, including the popular Working from Home articles, Twitter Q&A sessions and the Green Dream video series. She has also written in-depth analysis pieces exploring the impact of Covid-19 on ESG investing.