Investments in times of crisis: ESG comes to the fore

When talking about ESG investments, people tend to focus on the E. For some investors, ESG is synonymous with companies who care about the environment and sustainability. But the social and governance factors of the ESG ethos are being highlighted by the current pandemic.

Investments in times of crisis: ESG comes to the fore

How a company treats employees and consumers is a key factor for future investments. Other considerations included how well-prepared they were, and will be in future for an unforeseen disaster, as well as how resilient their business is.

The coronavirus crisis has sparked market volatility comparable with the global financial crisis 12 years ago. But amidst all this turmoil and the bleak human face of this tragedy, some investments have fared better than others. Data from industry tracker Morningstar showed that actively managed ESG funds have, on average, beaten their non-ESG rivals1. The biggest outperformance was in the UK, where the average ESG fund fell 14 per cent against 16.8 per cent for their non-ESG rivals.

This outperformance is doubtless linked to the fact that these funds have less exposure to both fossil fuel firms, which have suffered from the Russia-Saudi Arabia oil price war, and the high-emitting airline industry, which has been virtually grounded by the pandemic.

Pessimists might also suggest that this resilience in ESG funds will be short-lived. Some governments have responded to contracting economic conditions by repealing or ignoring environmental commitments. Pundits were astonished in March, for example, when the Trump administration announced that the US Environmental Protection Agency (EPA) would be suspending its enforcement of environmental laws during the outbreak. The move means that polluting the air or water will be allowable as long as the violations are “caused by” the pandemic in some way2. Earlier in the month, China had said that it would modify the level of environmental supervision of companies to help production in the country resume, although it stressed that this did not indicate that it would relax standards3.

The slowdown in global economic activity has led to reduced air pollution4, wild animals in cities5 and even a reduction in seismic activity6. But any environmental impact that might be seen as changes for the better could be wiped out by restarting those activities that ignore environmental laws and refuse further commitments to reduce climate change. How far governments might push this pursuit of short-term gains remains to be seen, but the gains will be just that – short term. What the pivot to an ESG mindset has shown is that concentrating on long-term goals reaps long-term, sustainable gains.

A lot of the public focus of ESG investments tends to be on the environmental part of the equation. Companies highly publicise their endeavours in this area and it can lead some to diminish the importance of the social and governance aspects. But these are the key assets that impact investors looking for opportunities today.

A company with strong governance will have disaster recovery and business continuity plans in place. They will also have a resilient business that is agile enough to adapt (within reason) to unforeseen crises.

Meanwhile, a company’s impact on society has become a highly distinguishing feature that greatly influences consumer sentiment. Appetite for a public bailout of companies in the airline and travel industry is low7 and these firms’ response to the crisis is being noted and criticised or praised across traditional and social media8. Similarly, the backlash against English Premier League football teams that chose to furlough non-playing staff that work in their grounds, while levying no impact on millionaire players and billionaire owners was fast and fierce9.

These are just a couple of examples, amidst many, of how strongly consumers today have changed how they view a company’s place in society. Good corporate citizens are rewarded with brand loyalty and advocates on social media. Those who may be deemed bad corporate citizens are publicly vilified and stand to lose consumers who can take their business elsewhere.

All of this makes investing with an eye towards ESG credentials an interesting proposition. Strong environmental commitments are necessary to build and develop a sustainable business that will meet standards today and the standards we will need to adopt in the future. In this crisis, more than ever, consumers have shown that they can and will vote with their wallets and voice their opinions, loudly and publicly.

And corporate governance from the bottom up will test and temper the resilience of a company, so that it is better able to weather the vagaries of the marketplace and the kind of unprecedented situations that no-one expects – and yet we find ourselves in.

Find out more about ESG investment opportunities by contacting your Relationship Manager or Investment Counsellor.

2The Guardian, Trump administration allows companies to break pollution laws during coronavirus pandemic, March 2020
3Reuters, China to modify environmental supervision of firms to boost post-coronavirus recovery, March 2020
4The Guardian, Coronavirus pandemic leading to huge drop in air pollution, March 2020
5The Guardian, Emboldened wild animals venture into locked-down cities worldwide, March 2020
6Nature, Coronavirus lockdowns have changed the way Earth moves, March 2020
7Financial Review, Britain says shareholders, not taxpayers, should bail out airlines, April 2020
8Business Insider, Airbnb is paying hosts USD250 million after they criticized the company for leaving them on the hook for coronavirus cancellations, March 2020
9BBC, Premier League players ‘prepared to step up’ amid coronavirus crisis, April 2020

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